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SEPTEMBER 2012

KSA TELECOM SECTOR BROADBAND REMAINS GROWTH FOCUS
We remain Overweight on STC and Mobily, and Neutral on Zain KSA. Focus on the broadband market for all three players remains key, with expansion in network capabilities being sought as a point of differentiation. Valuations remain attractive with the sector trading at 8.0x 2013E P/E. Although the upside on STC is greater, Mobily remains our preferred stock, given its strong fundamentals, excellent execution record and good dividend visibility.  In this report, we have updated our estimates on the three telecom stocks
under coverage based on recent results, discussions with management, and the most recent CITC data. We have revised our financial estimates, including the fair value for each stock. We maintain our ratings; we continue to be Overweight on STC, with a PT of SR51.8 (upside of 30%), and Mobily with a PT of SR81.9 (upside of 20%). We remain Neutral on Zain KSA, with a PT of SR11.3 (downside of 5%). We have raised our price targets for STC and Mobily by 1% and 4% to reflect the strong recent results and incorporating feedback from the management in terms of their short to medium term plans. STC has benefited from improved local operations and higher than expected Other Income, whilst Mobily has benefitted from margin expansion (in line with expectations), led by improved operational efficiencies. For Zain, we have reduced our PT by 30%, due to subdued revenue growth, leading to margin growth being held back. This is despite factoring in the balance sheet restructuring, completed in July 2012. We continue to believe the sector has a strong growth potential. Going forward, profit growth will be largely driven by value-added services (namely broadband), costs efficiencies, and international operations for STC. The corporate segment in general and the ICT segment in particular (e.g. data security, cloud computing) we believe is a source of continued growth for the sector with it a key target for Mobily. We believe the sector’s main concern is price-led competition, with voice ARPUs under significant pressure. We believe this price-led competition is now also moving into the data segment with operators increasingly launching new offers and different packages to gain subscribers. The commencement of operations from Mobile Virtual Network Operators (MVNO) would be another source of pressure for existing operators. Trading at an average 2013e P/E of 8.0x, the Saudi telecom sector remains attractive. A relatively stronger macro environment in the Kingdom is likely to support faster growth in the sector than in other regional countries.

 

Exhibit 1: Saudi telecom companies – Valuation matrix
TP Rating (SR) Saudi Telecom Co. OW Mobily OW Zain KSA N 51.8 81.9 11.3 MCap Stock perf (%) $mn Aug YTD 21,308 12,804 3,461 2.0 8.5 6.3 18.0 30.5 7.6 P/E EV/ P/BV (x) EBITDA (x) ’13 ‘13 ‘13 8.2 7.7 NM 3.6 5.7 7.0 1.4 2.0 1.7 DY (%) ‘13 ROE (%) ‘13 ROA (%) ‘13 8.3 14.3 (3.3)

5.0 17.8 6.8 27.0 0.0 (11.3)

Source: NCBC Research, All prices as of September 22, 2012 N: Neutral, UW: Underweight, OW: Overweight, NC: Not Covered

Farouk Miah, CFA
f.miah@ncbc.com +966 2 690 7717

Please refer to the last page for important disclaimer

www.ncbc.com

KSA TELECOM SECTOR SEPTEMBER 2012

NCB CAPITAL

Outlook summary
 Top-line growth led by broadband expected:
We expect total revenues for the three stocks under coverage to increase by 8% YoY to SR46bn in 2H12, driven by a higher broadband subscriber base and growth in Saudi Arabia’s corporate segment. Seasonal factors (Ramadan and Hajj) take place in 2H12 and should aid sequential growth in the sector. Intense competition in the international call business notwithstanding, margins should be supported by the high-margin Data segment and OpEx efficiencies. On the other hand, increased sales coming from handset items and the corporate segment may pressure margins for Mobily. Margin growth, coupled with higher revenues, is likely to result in EBITDA rising by 9% YoY to SR16bn in 2H12, and net income increasing 26% YoY to SR7.4bn. For Zain, on the one hand its financial outlook has improved post its balance sheet restructuring due to lower interest payments. However, it remains significantly behind STC and Mobily in terms of market share and available products, and the top-line performance has been muted in the past several quarters, holding back the pace of its recovery.

 Margin improvement key for players:
Stabilising margins remains a key focus for all operators in the sector. STC’s focus in 2012 is on stabilizing margins, which for several years has been contracting due to higher competition, expenditure and investment. Mobily, on the other hand, continues to focus on increasing its operational leverage and spread costs over a wider user base to support margins. Zain’s margin focus is on increasing its EBITDA margin given the high depreciation and amortization which is holding back its move towards net profitability. Separately, interconnection charges for STC and Mobily continued to fall in 2Q12, owing to reduced competition in the international call segment. We expect this trend to continue in 2H12, and support margins.

 Growth in broadband, mainly wireless, important for growth:
Broadband (mainly wireless –constituting 85% of all broadband users), remains the key source of growth for the telecom operators in the short to medium term. CITC’s latest update on the Data segment indicates that broadband penetration rate increased to 41.4% of the population in 1Q12 (11.95mn users) from 39.6% (11.34mn users) in 2011. We expect this segment to keep expanding in the coming years and support top-line growth in the sector, as the introduction of mid- and low-end smartphones and technology upgrades enable the use of richer media content, as well enabling lower income consumers access to data products. Mobily’s data segment accounted for 25% of its total revenues in 2Q12 compared to 22% in 2011, while STC reported an 88% YoY increase in KSA mobile broadband subscribers in 2Q12.

 Investment in network capacity and reach a focal point for all:
Based on conversations with the management of all three companies, all operators are focusing on investing to enhance their network capacity and reach. All have identified this as a source of differentiation, particularly given the broadband segment is seen as the key growth market, thus needing constantly increasing technological requirements to support the needs of consumers. Given STC has the greatest scale, we believe it is the best positioned to compete on the basis of network capacity and reach.

 STC’s international businesses still a work in progress:
Although the Turkish and Malaysian businesses are performing relatively well, the other major international businesses under STC have had various struggles
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KSA TELECOM SECTOR SEPTEMBER 2012

NCB CAPITAL

in the past six to twelve months. We believe the potential for the international business remains significant, however continued investments and focus on synergies will need to be made in order to extract the maximum value for STC. We believe there is a possibility STC may use its growing cash reserves to increase its stakes in its international business in order to have more control over day-to-day operations.

 Volatility in “Other Income” reduces visibility of numbers for STC:
Over the past five years, “Other Income” for STC has varied significantly from contributing a positive 19% of EBIT to equating a negative 12% of EBIT. Other Income is usually split into Miscellaneous income, FX gains/losses and Miscellaneous losses by the company. All three components vary significantly YoY and except FX, there is minimal visibility in forecasting the other two lines. This leads to the “Other Income” potentially cancelling strong EBIT performance due to Other income losses, or conversely making poor EBIT performance impressive on the net income line due to high Other Income. Thus we highlight this as a negative of the “quality” of the STC financials, as well as highlighting our preference of looking at EBIT to determine the underlying financial progress at STC.

 Corporate segment a target for Mobily, currently dominated by STC:
With the voice segment mature and competition in data increasing, Mobily has highlighted the corporate segment as a key source of potential growth. As the ex-monopoly operator in Saudi Arabia, we believe STC is the dominant player in the enterprise/corporate segment. With such a major hold in the market, largely due to lack of choice until now, we believe Mobily is well positioned to offer corporate clients an alternative partner. To strengthen its service capabilities, Mobily recently signed a SR1bn strategic deal with IBM which will enable Mobily to offer ICT solutions to corporate clients such as data security and cloud computing. With its strong execution track record, we believe Mobily will perform strongly in this segment, as well as developing new business in ICT.

 Zain in a better position post balance sheet restructuring, but remains
far behind peers : Although we believe the financial outlook for Zain KSA has improved after its balance sheet restructuring (mainly through lower financing charges), its operational outlook has deteriorated, as seen in the poor revenue growth figures in the past six months. Thus, despite the balance sheet restructuring, Zain faces a difficult road towards recording net profits. Additionally, high amortization costs from the SR23bn paid for its license fee, coupled with ongoing aggressive competition from STC and Mobily who dominate the market, will limit growth prospects for Zain and firmly keep it as the number three operator in the Saudi market.

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KSA TELECOM SECTOR SEPTEMBER 2012

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Changes to estimates
In the table below, we have highlighted the changes to our 2012 and 2013 numbers and price targets since our last update on the sector in July 2012.
Exhibit 2: Changes to estimates
In SR mn, unless otherwise stated
Old 2012E New 2012E % Chg % Gr Old 2013E New 2013E % Chg % Gr

Saudi Telecom Co. Revenue Gross Profit EBITDA EBIT Net profit Price target Mobily Revenue Gross profit EBITDA EBIT Net profit Price target Zain KSA Revenue Gross profit EBITDA EBIT Net profit Price target
Source: NCBC Research estimates

60,523 34,125 21,865 12,792 9,136 SR 22,353 11,770 8,528 6,216 5,979 SR 7,315 3,480 1,368 (502) (1,432) SR

59,729 33,714 21,492 12,608 9,816

(1.3) (1.2) (1.7) (1.4) 7.5

7.3 7.6 7.3 12.9 27.0

63,245 35,567 22,923 13,322 8,831 51.2 23,641 12,377 8,995 6,437 6,116 78.7 8,118 4,076 1,986 (76) (1,005) 16.2

62,587 35,164 22,469 13,160 9,692 51.8 24,410 12,751 9,062 6,484 6,190 81.9 7,483 3,643 1,848 (285) (940) 11.3

(1.0) (1.1) (2.0) (1.2) 9.7 1.2 3.3 3.0 0.7 0.7 1.2 4.0 (7.8) (10.6) (6.9) 274.9 (6.5) (29.8)

4.8 4.3 4.5 4.4 (1.3)

22,436 11,787 8,363 6,052 5,843

0.4 0.2 (1.9) (2.6) (2.3)

11.9 14.2 12.2 14.1 14.9

8.8 8.2 8.4 7.1 5.9

6,887 3,114 1,261 (645) (1,511)

(5.9) (10.5) (7.8) 28.7 5.6

2.8 (2.7) 40.3 (20.5) (21.5)

8.7 17.0 46.5 (55.8) (37.8)

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TELECOM 25 SEPTEMBER 2012

SAUDI TELECOM COMPANY
COMPANY UPDATE

Decision on use of cash a potential catalyst
We remain Overweight on STC and raise our PT by 1% to SR51.8. Bottom-line gains in international operations and continued growth in the Saudi Arabian market are key drivers. Price competition at home and FX exposure are key risks. Use of its growing cash pile; either by increasing its dividend or increasing its stake in its international businesses is a key catalyst.  Revenue growth to continue in 2013; ‘other income’ key to net profit:
We expect STC’s revenues to grow 6% YoY to SR30.5bn in 2H12, mainly driven by broadband. This, along with lower costs, will lead to an 10% increase in EBIT during the period. We feel EBIT is a fairer representation of performances, due to the volatile nature of non-operating items. Our estimate for net income growth in 2H12 is 25%, owing to higher other income. For 2013e we expect revenue growth of 4.8% and EBIT growth of 4.4%.

OVERWEIGHT
Target price
Current price (SR)

51.8
39.9

STOCK DETAILS
M52-week range H/L (SR) Market cap ($mn) Shares outstanding (mn) Listed on exchanges Price perform (%) Absolute Rel. to market 1M 2.3 3.3 43/33 21,308 2,000 TADAWUL 3M 1.8 (2.0) SR 39.5 38.5 12M 17.4 1.8 US$ 10.5 10.3

 FX continues to impact international business: While STC’s local
operations are doing well, its international division’s revenues (32% of the total in 2Q12) has been limited by negative FX moves which have held back the financial performance. The depreciation of the South African Rand and the Turkish Lira against the Saudi Riyal have been the main culprits. For 2H12, with the weakening of USD, this should aid income from abroad.

Avg daily turnover (mn) 3M 12M Reuters code Bloomberg code

7010.SE STC AB www.stc.com.sa

 Growing cash levels could be used to increase dividends/stakes: STC’s
cash balance is expected to stand at over SR10bn at the end of 2012 with FCF generation strong. With M&A opportunities limited, its cash could be used to increase its dividend back to SR0.75/quarter or increase its stakes in foreign business, with the Turkish business the most likely candidate. A dividend increase would be a short-term catalyst with a stake increase needing more time to prove effective.

VALUATION MULTIPLES
11A Reported P/E (x) Adjusted P/E (x) P/B (x) EV/EBITDA (x) Div Yield (%) 10.3 10.1 1.7 4.0 5.5 12E 8.1 8.1 1.5 3.7 5.0 13E 8.2 8.2 1.4 3.6 5.0

Source: NCBC Research estimates

 Limited changes to numbers, net income higher due to Other Income:
Our estimates for most lines have not changed significantly, although higher Other Income forecasts leads our net income estimates to increase by 510%; this change is off the back of recent results from STC.

SHARE PRICE PERFORMANCE
50 45 40 35 30 25 Sep-11 Mar-12
STC

8500 7700 6900 6100 5300 4500 Sep-12
Tadawul (RHS)

 Remain overweight, PT up 1% to SR51.8: An attractive valuation, the
highest percentage of post-paid subscribers in KSA, dominance in DSL and potential gains from the international business are STC’s key strengths.
Summary Financials
SR mn Revenues Gross profit EBITDA EBITDA margin (%) Adjusted net income Adj. net margin (%) EPS (SR) DPS (SR)
Source: Company, NCBC Research

2011A 55,662 31,328 20,025 36.0 7,863 14.1 3.93 2.00

2012E 59,729 33,714 21,492 36.0 9,816 16.4 4.91 2.00

2013E 62,587 35,164 22,469 35.9 9,692 15.5 4.85 2.00

2014E 64,895 36,397 23,386 36.0 10,257 15.8 5.13 2.00

2015E 67,072 37,565 24,272 36.2 10,763 16.0 5.38 2.00

CAGR (%) 4.8 4.6 4.9 8.2 8.2 0.0

Source: Reuters

Farouk Miah, CFA

+966 2 690 7717 f.miah@ncbc.com

Please refer to the last page for important disclaimer

www.ncbc.com

SAUDI TELECOM COMPANY 25 SEPTEMBER 2012

NCB CAPITAL

Financials
Exhibit 3: Income Statement
In SR millions, unless otherwise stated
2010A 2011A 2012E 2013E 2014E 2015E

Revenues % change Cost of services Gross profit Gross margin (%) Operating expenses EBITDA EBITDA margin (%) Dep. & Amortization EBIT EBIT margin (%) Financing costs Other inc./expenses, net Pre-tax profit Tax (Zakat) Reported net income Adjusted net income % change Net margin (%) EPS (SR)
Source: NCBC Research estimates

51,787 2.0 (21,464) 30,323 58.6 (19,344) 19,621 37.9 (8,642) 10,978 21.2 (1,781) 1,779 10,977 (938) 9,436 8,708 (14.5) 16.8 4.35

55,662 7.5 (24,334) 31,328 56.3 (20,157) 20,025 36.0 (8,854) 11,171 20.1 (2,238) (445) 8,488 (597) 7,729 7,863 (9.7) 14.1 3.93

59,729 7.3 (26,014) 33,714 56.4 (21,106) 21,492 36.0 (8,884) 12,608 21.1 (2,223) 819 11,204 (687) 9,816 9,816 24.8 16.4 4.91

62,587 4.8 (27,423) 35,164 56.2 (22,004) 22,469 35.9 (9,309) 13,160 21.0 (2,095) 105 11,170 (674) 9,692 9,692 (1.3) 15.5 4.85

64,895 3.7 (28,498) 36,397 56.1 (22,771) 23,386 36.0 (9,760) 13,626 21.0 (1,930) 151 11,847 (738) 10,257 10,257 5.8 15.8 5.13

67,072 3.4 (29,506) 37,565 56.0 (23,357) 24,272 36.2 (10,064) 14,208 21.2 (1,794) 30 12,445 (788) 10,763 10,763 4.9 16.0 5.38

Exhibit 4: Balance Sheet
In SR millions, unless otherwise stated
2010A 2011A 2012E 2013E 2014E 2015E

Cash & cash equivalent Other current assets Total current assets Net fixed assets Intangible assets, net Investments Other assets Total non-current assets Total assets Short-term loans Other current liabilities Total current liabilities Long-term loan Other liabilities Total non-current liabilities Total liabilities Share capital Reserves & surplus Shareholders' funds Total equity & liabilities
Source: NCBC Research estimates

6,051 12,268 18,704 55,127 31,837 2,540 2,572 92,077 110,781 8,447 18,171 26,618 21,741 8,957 30,698 57,317 20,000 16,265 44,996 110,781

6,589 12,933 21,967 55,085 29,318 2,682 2,349 89,435 111,402 5,972 19,291 25,263 23,960 8,097 32,056 57,319 20,000 18,042 46,908 111,402

10,318 13,274 26,038 53,470 29,318 2,873 2,761 88,422 114,460 5,173 18,182 23,354 24,556 7,351 31,908 55,262 20,000 23,858 52,725 114,460

12,325 14,205 28,976 55,471 29,318 3,079 3,056 90,924 119,899 5,138 20,411 25,548 22,884 7,381 30,265 55,814 20,000 29,550 58,417 119,899

12,836 14,878 30,160 57,064 29,318 3,303 3,253 92,937 123,098 4,843 20,345 25,187 20,968 7,370 28,338 53,526 20,000 35,895 64,762 123,098

14,749 15,515 32,710 58,355 29,318 3,546 3,321 94,540 127,250 4,461 20,346 24,807 19,533 7,315 26,848 51,655 20,000 42,826 71,692 127,250

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SAUDI TELECOM COMPANY 25 SEPTEMBER 2012

NCB CAPITAL

Exhibit 5: Cash Flow Statement
In SR millions, unless otherwise stated
2010A 2011A 2012E 2013E 2014E 2015E

Cash flow from op. (a) Cash flow from inv.(b) NOPLAT WC CAPEX Depreciation Free cash flow Cash flow from fin.(c) Net chg. in cash (a+b+c) Cash at start of the year Cash at end of the year
Source: NCBC Research estimates

21,185 (13,175) 10,978 94 (11,353) 8,642 8,244 (9,669) (1,659) 7,710 6,051

16,488 (8,264) 11,171 456 (7,837) 8,854 12,488 (7,686) 538 6,051 6,589

16,092 (7,459) 12,608 (1,451) (5,973) 8,884 13,817 (4,903) 3,730 6,589 10,318

20,034 (11,516) 13,160 1,298 (10,014) 9,309 13,438 (6,511) 2,007 10,318 12,325

19,158 (11,577) 13,626 (740) (10,059) 9,760 12,235 (7,070) 511 12,325 12,836

20,235 (11,598) 14,208 (635) (10,061) 10,064 13,194 (6,724) 1,913 12,836 14,749

Exhibit 6: Key Ratios
Per share, unless otherwise stated
2010A 2011A 2012E 2013E 2014E 2015E

EPS FCF per share Div per share Book value per share Valuation ratios (x) P/E P/FCF P/BV EV/sales EV/EBITDA Div yield (%) Profitability ratios (%) Gross margins Operating margin EBITDA margins Net profit margins ROE ROA Liquidity ratios Current ratio Quick Ratio Operating ratios (days) Inventory Receivables outstanding Payables outstanding Operating cycle Cash cycle
Source: NCBC Research estimates

4.7 4.1 3.0 22.5 8.5 9.7 1.8 1.5 4.1 6.8 58.6 21.2 37.9 16.8 20.0 8.0 0.7 0.7 5 61 120 67 (53)

3.9 6.2 2.0 23.5 10.3 6.4 1.7 1.4 4.0 5.5 56.3 20.1 36.0 14.1 17.1 7.1 0.9 0.8 5 57 78 63 (15)

4.9 6.9 2.0 26.4 8.1 5.8 1.5 1.3 3.7 5.0 56.4 21.1 36.0 16.4 19.7 8.7 1.1 1.1 6 63 74 70 (5)

4.8 6.7 2.0 28.2 8.2 5.9 1.4 1.3 3.6 5.0 56.2 21.0 35.9 15.5 17.8 8.3 1.1 1.0 6 63 74 69 (4)

5.1 6.1 2.0 30.3 7.8 6.5 1.3 1.2 3.4 5.0 56.1 21.0 36.0 15.8 17.5 8.7 1.0 1.0 6 63 70 69 (0)

5.4 6.6 2.0 32.7 7.4 6.0 1.2 1.2 3.3 5.0 56.0 21.2 36.2 16.0 17.1 9.0 1.1 1.0 6 63 68 69 1

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TELECOM  25 SEPTEMBER 2012

MOBILY
COMPANY UPDATE

Corporate potential, dividend payout key catalysts
We remain Overweight on Mobily, with our PT increasing by 4% to SR81.9. We believe the company is well positioned to benefit from KSA’s broadband growth; the tie-up with IBM is also likely to enhance its ability to compete in the corporate segment and enhance its ICT potential. The 7% dividend yield expected in 2013 is another key strength and a downside support for the stock.  Broadband and increasingly corporate focus main driver of financials:
We expect Mobily to continue recording double-digit revenue growth in 2H12 with broadband the key driver. Modest YoY margin gains are expected to persist with net income expected at SR3.2bn in 2H12. 2013e and beyond should see steady but declining top-line growth, led increasingly by the focus on the corporate segment, although margins may come under pressure as a result.

OVERWEIGHT
Target price
Current price (SR)

81.9
68.5

STOCK DETAILS
M52-week range H/L (SR) Market cap ($mn) Shares outstanding (mn) Listed on exchanges Price perform (%) Absolute Rel. to market 1M (0.7) 0.3 70/50 12,804 700 TADAWUL 3M 6.2 2.4 SR 42.2 50.7 12M 28.6 13.1 US$ 11.3 13.5

 IBM deal highlights corporate ambitions: Although the corporate segment
currently contributes less than 10% of sales, Mobily management are targeting this segment as a key source of growth. The recently signed fiveyear deal with IBM for SR1bn to enter the ICT industry we believe positions Mobily strongly to take market share from STC, as well as enter the related ICT market. Although this segment has lower margins, it will add significant potential to the earnings growth of Mobily.

Avg daily turnover (mn) 3M 12M Reuters code Bloomberg code

7020.SE EEC AB www.mobily.com.sa

 Dividend outlook positive, remains a key catalyst: Mobily paid dividends
of SR2/share in 1H12 and we expect it to comfortably pay a full-year dividend of SR4 in 2012 and SR5 in 2013. This indicates a yield of 6% rising to 7% in 2013. Given the retail nature of the Saudi Arabian market and demand for high-yielding stocks, we continue to believe the strong dividend outlook for Mobily will support the stock price and provides strong downside support.

VALUATION MULTIPLES
11A P/E (x) P/B (x) EV/EBITDA (x) Div Yield (%) 9.4 2.6 6.5 6.2 12E 8.2 2.2 6.4 5.8 13E 7.7 2.0 5.7 6.8

Source: NCBC Research estimates

 Remain Overweight on good fundamentals and rising yield: Mobily’s
financial growth is currently led by broadband with the next phase focused on corporate and ICT segments. Its strong outlook, excellent execution capabilities and dividend visibility place it ahead of its peers in KSA’s telecom sector. In addition, the stock has an attractive valuation of 7.7x P/E 2013e.

SHARE PRICE PERFORMANCE
75 68 61 54 47 40 Sep-11
Mobily
Source: Reuters

8,500 7,700 6,900 6,100 5,300 4,500 Mar-12 Sep-12
Tadawul (RHS)

Summary Financials
SR mn Revenues Gross profit EBITDA EBITDA margin (%) Net income Net margin (%) EPS (SR) DPS (SR)
Source: Company, NCBC Research

2011A 20,052 10,324 7,454 37.2 5,083 25.4 7.26 3.25

2012E 22,436 11,787 8,363 37.3 5,843 26.0 8.35 4.00

2013E 24,410 12,751 9,062 37.1 6,190 25.4 8.84 4.68

2014E 26,109 13,695 9,737 37.3 6,636 25.4 9.48 5.40

2015E 27,831 14,770 10,606 38.1 7,337 26.4 10.48 6.18

CAGR (%) 8.5 9.4 9.2 9.6 9.6 17.4 Farouk Miah, CFA +966 2 690 7717 f.miah@ncbc.com

Please refer to the last page for important disclaimer

www.ncbc.com

MOBILY 25 SEPTEMBER 2012

NCB CAPITAL

Financials
Exhibit 7: Income Statement
In SR millions, unless otherwise stated
2010A 2011A 2012E 2013E 2014E 2015E

Revenues % change Cost of services Gross profit Gross margin (%) Operating expenses EBITDA EBITDA margin (%) Dep. & Amortization EBIT EBIT margin (%) Interest charges, net Other income Pre-tax profit Tax (Zakat) Net income % change Net margin (%) EPS (SR)
Source: NCBC Research estimates

16,013 22.6 (7,230) 8,783 54.9 (2,619) 6,165 38.5 (1,810) 4,355 27.2 (146) 70.5 4,279 (67) 4,211 39.7 26.3 6.02

20,052 25.2 (9,728) 10,324 51.5 (2,870) 7,454 37.2 (2,149) 5,305 26.5 (213) 45.7 5,138 (54) 5,083 20.7 25.4 7.26

22,436 11.9 (10,648) 11,787 52.5 (3,424) 8,363 37.3 (2,311) 6,052 27.0 (178) 54.9 5,929 (86) 5,843 14.9 26.0 8.35

24,410 8.8 (11,659) 12,751 52.2 (3,689) 9,062 37.1 (2,578) 6,484 26.6 (261) 57.6 6,281 (92) 6,190 5.9 25.4 8.84

26,109 7.0 (12,413) 13,695 52.5 (3,959) 9,737 37.3 (2,815) 6,921 26.5 (248) 60.5 6,734 (98) 6,636 7.2 25.4 9.48

27,831 6.6 (13,061) 14,770 53.1 (4,164) 10,606 38.1 (2,990) 7,616 27.4 (233) 63.5 7,446 (108) 7,337 10.6 26.4 10.48

Exhibit 8: Balance Sheet
In SR millions, unless otherwise stated
2010A 2011A 2012E 2013E 2014E 2015E

Cash & cash equivalents Short-term investments Other current assets Total current assets Net fixed assets License fees Goodwill Total non-current assets Total assets Short-term loans Cr. portion of long-term loans Other current liabilities Total current liabilities Long-term loan Other liabilities Total non-current liabilities Total liabilities Share capital Reserves & surplus Shareholders' funds Total equity & liabilities
Source: NCBC Research estimates

1,661 450 7,304 9,415 12,457 10,028 1,530 24,015 33,430 599 1,843 9,814 12,256 5,529 66 5,595 17,851 7,000 8,580 15,580 33,430

1,690 0 8,204 9,893 16,412 9,665 1,530 27,607 37,501 1,201 4,895 11,951 18,047 977 89 1,066 19,113 7,000 11,388 18,388 37,501

2,647 0 9,707 12,354 19,124 9,170 1,530 29,823 42,177 0 598 11,984 12,582 8,048 116 8,164 20,746 7,000 14,431 21,431 42,177

2,690 0 10,467 13,157 21,232 8,634 1,530 31,395 44,553 0 1,495 12,046 13,542 6,553 113 6,666 20,208 7,000 17,345 24,345 44,553

3,173 0 11,119 14,292 22,608 8,098 1,530 32,235 46,528 0 1,433 11,735 13,168 6,033 123 6,156 19,324 7,000 20,203 27,203 46,528

3,538 0 11,891 15,429 23,494 7,562 1,530 32,585 48,014 0 1,371 11,631 13,002 4,662 133 4,795 17,797 7,000 23,217 30,217 48,014

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MOBILY 25 SEPTEMBER 2012

NCB CAPITAL

Exhibit 9: Cash Flow Statement
In SR millions, unless otherwise stated
2010A 2011A 2012E 2013E 2014E 2015E

Cash flow from op. (a) Cash flow from inv.(b) NOPLAT WC CAPEX Depreciation Free cash flow Cash flow from fin.(c) Net chg. in cash (a+b+c) Cash at start of the year Cash at end of the year
Source: NCBC Research estimates

5,493 (3,113) 4,286 (482) (3,387) 1,810 2,228 (1,651) 728 933 1,661

6,823 (3,408) 5,249 1,237 (5,583) 2,149 3,052 (3,387) 28 1,661 1,690

6,889 (4,527) 5,964 (1,469) (4,487) 2,311 2,318 (1,405) 957 1,690 2,647

8,327 (4,150) 6,390 (698) (4,150) 2,578 4,120 (4,134) 43 2,647 2,690

8,745 (3,655) 6,820 (964) (3,655) 2,815 5,017 (4,607) 483 2,690 3,173

9,694 (3,340) 7,505 (876) (3,340) 2,990 6,279 (5,990) 364 3,173 3,538

Exhibit 10: Key Ratios
Per share, unless otherwise stated
2010A 2011A 2012E 2013E 2014E 2015E

EPS FCF per share Div per share Book value per share Valuation ratios (x) P/E P/FCF P/BV EV/sales EV/EBITDA Div yield (%) Profitability ratios (%) Gross margins Operating margin EBITDA margins Net profit margins ROE ROA Liquidity ratios Current ratio Quick Ratio Operating ratios (days) Inventory Receivables outstanding Payables outstanding Operating cycle Cash cycle
Source: NCBC Research estimates

6.0 3.2 2.0 22.3 11.4 21.5 3.1 3.3 8.5 3.9 54.9 27.2 38.5 26.3 30.3 13.1 0.8 0.7 15 131 314 146 (168)

7.3 4.4 3.3 26.3 9.4 15.7 2.6 2.4 6.5 6.2 51.5 26.5 37.2 25.4 29.9 14.3 0.5 0.5 18 115 293 133 (160)

8.3 3.3 4.0 30.6 8.2 20.7 2.2 2.4 6.4 5.8 52.5 27.0 37.3 26.0 29.3 14.7 1.0 0.9 19 119 266 137 (129)

8.8 5.9 4.7 34.8 7.7 11.6 2.0 2.1 5.7 6.8 52.2 26.6 37.1 25.4 27.0 14.3 1.0 0.9 19 117 239 137 (102)

9.5 7.2 5.4 38.9 7.2 9.6 1.8 1.9 5.2 7.9 52.5 26.5 37.3 25.4 25.7 14.6 1.1 1.0 20 115 212 136 (77)

10.5 9.0 6.2 43.2 6.5 7.6 1.6 1.8 4.6 9.0 53.1 27.4 38.1 26.4 25.6 15.5 1.2 1.1 21 116 195 138 (57)

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TELECOM  25 SEPTEMBER 2012

ZAIN KSA
COMPANY UPDATE

Better positioned, but net profits far away
We remain Neutral on Zain KSA, with our PT falling by 30% to SR11.3. With the capital restructuring complete, it will lead to lower financing costs and higher capex, however we expect it to be net profitable only by 2016. Higher turnover is the key to margin growth. We lower our revenue/gross profit estimates given weaker than expected results.  Moving slowly towards profitability: With its balance sheet restructuring
complete, lower financing costs should help in moving Zain towards profitability. Revenues are likely to grow 6% YoY to SR3.7bn in 2H12, partially due to a weak base in 2H11. This, coupled with lower OpEx and financial expenses, is likely to result in net losses narrowing 26% to SR698mn in 2H12. Revenue and net income should grow by 8.7% and 37.8% YoY in 2013e.

NEUTRAL
Target price (SR)
Current price (SR)

11.3
12.0

STOCK DETAILS
M52-week range H/L (SR) Market cap ($ mn) Shares outstanding (mn) Listed on exchanges Price perform (%) Absolute Rel. to market 1M (2.8) (1.8) 23/11 3,461 1,080 TADAWUL 3M (30.4) (34.2) SR 277.8 351.1 12M (2.8) (18.4) US$ 74.2 93.8

 High amortization costs remain drag on financials: Off the back of paying
SR23bn for its license in June 2007, Zain continues to pay around SR240mn every quarter in amortization costs for the license. Thus, despite the lower interest payments due to the balance sheet restructuring, high amortization remains a drag on Zain’s financials.

Avg daily turnover (mn) 3M 12M Reuters code Bloomberg code

7030.SE ZAINKSA AB www.sa.zain.com

 Top-line growth needed for effective move towards profitability: Zain’s
top line declined 1.2% YoY in 1H12 after recording a subdued 3.6% YoY growth in 2H11. Lack of revenue growth coupled with a high fixed cost base limits the possibility of margin progress. Competition in the sector remains high, with ARPUs under pressure. Peers are being able to negate this given their focus on the higher ARPU broadband segment, although Zain has struggled to gain market share in this segment.

VALUATION MULTIPLES
11A P/E (x) P/B (x) EV/EBITDA (x) Div Yield (%) NM 3.9 18.7 0.0 12E NM 1.5 10.3 0.0 13E NM 1.7 7.0 0.0

 Capex to focus on network capacity/reach: Zain management has stated
investment in its network capacity and reach as the key point of focus. We believe the move away from competing purely on price, and instead focusing on its product will enable Zain to compete with its peers more effectively.

Source: NCBC Research estimates

SHARE PRICE PERFORMANCE
25 20 15 10 5 Sep-11
Zain

8,500 7,700 6,900 6,100 5,300 4,500 Mar-12 Sep-12
Tadawul (RHS)

 Remain Neutral: We remain Neutral on the stock with our PT falling to
SR11.3. The successful restructuring of its balance sheet has improved the outlook for Zain, although we expect it to take several years before it makes a profit on the net income line.
Summary Financials
SR mn Revenues Gross profit EBITDA EBITDA margin (%) Net income Net margin (%) EPS (SR) DPS (SR)
Source: Company, NCBC Research

Source: Reuters

2011A 6,699 3,200 899 13.4 (1,925) (28.7) (1.38) 0.00

2012E 6,887 3,114 1,261 18.3 (1,511) (21.9) (1.40) 0.00

2013E 7,483 3,643 1,848 24.7 (940) (12.6) (0.87) 0.00

2014E 8,110 4,123 2,376 29.3 (466) (5.7) (0.43) 0.00

2015E 8,659 4,530 2,749 31.7 (195) (2.3) (0.18) 0.00

CAGR (%) 7.1 11.1 24.1 NM NM 0.0 Farouk Miah, CFA +966 2 690 7717 f.miah@ncbc.com

Please refer to the last page for important disclaimer

www.ncbc.com

ZAIN KSA 25 SEPTEMBER 2012

NCB CAPITAL

Financials
Exhibit 11: Income Statement
In SR millions, unless otherwise stated
2010A 2011A 2012E 2013E 2014E 2015E

Revenues % change Cost of services Gross profit Gross margin (%) Operating expenses EBITDA EBITDA margin (%) Dep. & Amortization EBIT EBIT margin (%) Financing costs Other inc./expenses, net Pre-tax profit Tax (Zakat) Net income % change Net margin (%) EPS (SR)
Source: NCBC Research estimates

5,934 97.5 (3,404) 2,530 42.6 (2,200) 331 5.6 (1,494) (1,164) (19.6) (1,196) 0.7 (2,358) 0.0 (2,358) (23.9) (39.7) (1.7)

6,699 12.9 (3,499) 3,200 47.8 (2,301) 899 13.4 (1,710) (811) (12.1) (1,114) 0.1 (1,925) 0.0 (1,925) (18.4) (28.7) (1.4)

6,887 2.8 (3,774) 3,114 45.2 (1,852) 1,261 18.3 (1,907) (645) (9.4) (868) 2.3 (1,511) 0.0 (1,511) (21.5) (21.9) (1.1)

7,483 8.7 (3,840) 3,643 48.7 (1,795) 1,848 24.7 (2,134) (285) (3.8) (668) 13.7 (940) 0.0 (940) (37.8) (12.6) (0.7)

8,110 8.4 (3,987) 4,123 50.8 (1,747) 2,376 29.3 (2,234) 142 1.8 (615) 6.3 (466) 0.0 (466) (50.4) (5.7) (0.3)

8,659 6.8 (4,129) 4,530 52.3 (1,782) 2,749 31.7 (2,337) 412 4.8 (615) 7.3 (195) 0.0 (195) (58.1) (2.3) (0.1)

Exhibit 12: Balance Sheet
In SR millions, unless otherwise stated
2010A 2011A 2012E 2013E 2014E 2015E

Cash & cash equivalents Other current assets Total current assets Net fixed assets Other assets - license fees Other assets – other licenses Total non-current assets Total assets Short-term loans Other current liabilities Total current liabilities Adv. from shareholder non-current portion Long-term loan Other liabilities Total non-current liabilities Total liabilities Share capital Reserves & surplus Shareholders' funds Total equity & liabilities
Source: NCBC Research estimates

702 1,900 2,603 4,298 21,060 95 25,453 28,055 2,194 5,260 7,454 3,665 9,656 17 14,472 21,926 14,000 (7,736) 6,129 28,055

780 1,652 2,432 4,059 20,178 75 24,312 26,744 0 5,717 15,511 4,019 0 23 6,940 22,451 14,000 (9,661) 4,293 26,744

4,560 1,822 6,382 4,136 19,360 59 23,556 29,938 2,250 5,612 7,908 1,655 8,988 25 13,248 21,156 10,801 (1,974) 8,782 29,938

2,111 1,763 3,874 4,108 18,468 42 22,617 26,492 0 5,354 5,399 1,655 8,988 27 13,251 18,650 10,801 (2,914) 7,841 26,492

2,449 1,937 4,386 3,992 17,604 22 21,618 26,004 0 5,330 5,376 1,655 8,988 30 13,253 18,629 10,801 (3,380) 7,375 26,004

3,293 2,146 5,439 3,788 16,746 1 20,535 25,973 0 5,492 8,038 1,655 6,488 32 10,755 18,793 10,801 (3,575) 7,180 25,973

12

ZAIN KSA 25 SEPTEMBER 2012

NCB CAPITAL

Exhibit 13: Cash Flow Statement
In SR millions, unless otherwise stated
2010A 2011A 2012E 2013E 2014E 2015E

Cash flow from op. (a) Cash flow from inv.(b) NOPLAT WC CAPEX Depreciation Free cash flow Cash flow from fin.(c) Net chg. in cash (a+b+c) Cash at start of the year Cash at end of the year
Source: NCBC Research estimates

462 (308) (1,164) (1,596) (1,404) 1,494 (2,670) 42 196 506 702

(88) (309) (811) 796 (960) 1,710 735 475 78 702 780

1,679 (1,151) (645) (817) (1,136) 1,907 (692) 3,252 3,780 780 4,560

1,664 (1,195) (285) (199) (1,179) 2,134 470 (2,918) (2,449) 4,560 2,111

2,187 (1,234) 142 (198) (1,216) 2,234 962 (615) 338 2,111 2,449

2,712 (1,254) 412 (47) (1,234) 2,337 1,468 (615) 844 2,449 3,293

Exhibit 14: Key Ratios
Per share, unless otherwise stated
2010A 2011A 2012E 2013E 2014E 2015E

EPS FCF per share Div per share Book value per share Valuation ratios (x) P/E P/FCF P/BV EV/sales EV/EBITDA Div yield (%) Profitability ratios (%) Gross margins Operating margin EBITDA margins Net profit margins ROE ROA Liquidity ratios Current ratio Quick Ratio Operating ratios (days) Inventory Receivables outstanding Payables outstanding Operating cycle Cash cycle
Source: NCBC Research estimates

(1.7) (0.5) 0.0 4.4 NM NM 2.7 2.8 50.8 0.0 42.6 (19.6) 5.6 (39.7) (32.0) (8.4) 0.3 0.3 3 90 226 93 (133)

(1.4) 0.3 0.0 3.1 NM 35.7 3.9 2.5 18.7 0.0 47.8 (12.1) 13.4 (28.7) (36.9) (7.0) 0.2 0.2 5 55 168 59 (108)

(1.4) 0.9 0.0 8.1 NM 13.5 1.5 1.9 10.3 0.0 45.2 (9.4) 18.3 (21.9) (23.1) (5.3) 0.8 0.8 7 53 98 60 (38)

(0.9) 1.4 0.0 7.3 NM 8.8 1.7 1.7 7.0 0.0 48.7 (3.8) 24.7 (12.6) (11.3) (3.3) 0.7 0.7 5 54 88 59 (29)

(0.4) 1.7 0.0 6.8 NM 7.0 1.8 1.6 5.5 0.0 50.8 1.8 29.3 (5.7) (6.1) (1.8) 0.8 0.8 5 55 78 61 (17)

(0.2) 1.8 0.0 6.6 NM 6.7 1.8 1.5 4.7 0.0 52.3 4.8 31.7 (2.3) (2.7) (0.8) 0.7 0.7 6 58 73 63 (10)

13

KSA TELECOM SECTOR SEPTEMBER 2012

NCB CAPITAL

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NCBC Research website http://research.ncbc.com

Brokerage website www.alahlitadawul.com www.alahlibrokerage.com

Corporate website www.ncbc.com

NCBC Investment Ratings OVERWEIGHT: NEUTRAL: UNDERWEIGHT: PRICE TARGET: Target price represents expected returns in excess of 15% in the next 12 months Target price represents expected returns between -10% and +15% in the next 12 months Target price represents a fall in share price exceeding 10% in the next 12 months Analysts set share price targets for individual companies based on a 12 month horizon. These share price targets are subject to a range of company specific and market risks. Target prices are based on a methodology chosen by the analyst as the best predictor of the share price over the 12 month horizon

Other Definitions NR: Not Rated. The investment rating has been suspended temporarily. Such suspension is in compliance with applicable regulations and/or in circumstances when NCB Capital is acting in an advisory capacity in a merger or strategic transaction involving the company and in certain other situations CS: Coverage Suspended. NCBC has suspended coverage of this company NC: Not covered. NCBC does not cover this company

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