gcc telecoms equities telecom - jrj

Disclosures & Disclaimer

This report must be read with the disclosures and the analyst certifications in

the Disclosure appendix, and with the Disclaimer, which forms part of it.

Issuer of report: HSBC Bank Middle East Ltd

View HSBC Global Research at:

https://www.research.hsbc.com

GCC markets are highly penetrated and subscriber gains

have become a zero-sum game

Operators have widely used pricing to attract/retain

subscribers, thus eroding value

We revise our TPs on new estimates; STC and Zain Group

are our top picks in the region

All eyes on competition: In this report, we look at the competitive landscape in the

main GCC telecom markets. In Kuwait, increasingly generous data allowances are

not conducive to data monetisation. Market shares in Qatar have stabilised and any

gains will be achieved through further ARPU erosion. In Saudi Arabia, Zain KSA’s

gains have been made via aggressive pricing. We expect competition in the UAE to

remain rational: du (DU UH, AED 6.69, NR) has achieved critical mass in terms of

mobile subscribers and may reassess its pricing strategy to drive profitability instead.

STC and Zain Group: our only Buy-rated stocks in the region: STC is the

dominant player in Saudi Arabia and leverages its position to increase cash returns.

We like its steady cash generation and un-geared balance sheet. Barring any M&A

activity, we think it has the scope to increase dividends. Our Buy case on Zain Group

is a valuation call: the share price effectively ascribes nil value to Iraq and Sudan,

which we think is unjustified as both operations remain cash generative, despite geo-

political risks. Zain Group’s c12% 2017e dividend yield and c26% free cash flow yield

should provide support and the stock trades significantly below EEMEA averages.

Today we also initiated on Zain KSA at Reduce with a SAR6.35 TP (see our

report Recapitalisation and dilution seem unavoidable): Zain KSA’s market share

gains have been achieved through aggressive pricing. Cash generation has been low

because of aggressive pricing and disproportionate spend on sales & marketing. The

company’s growth has been stunted by the cost of its telecoms license (SAR22.9bn)

and a debt-heavy capital structure. Net interest expenses represent half of EBITDA

and have been in large part responsible for the delay in reaching net profitability. We

do not think a tower disposal can solve the issue and another recapitalisation

(through a rights issue or debt swap) seems unavoidable. In either case, minority

shareholders’ stakes would be diluted by nearly half.

25 July 2016

Eric Chang*

Analyst

HSBC Bank Middle East Ltd.

[email protected]

+971 4 423 6554

Herve Drouet* Head of EEMEA TMT Equity Research

HSBC Bank plc

[email protected]

+44 20 7991 6827

Ziyad Joosub*

Analyst

HSBC Securities (South Africa) (Pty) Ltd

[email protected]

+27 11 676 4223

Nikhil Mishra*

EEMEA Telecoms Associate

Bangalore

* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations

GCC Telecoms EQUITIES TELECOM

MENA

HSBC’s MENA telecoms coverage universe: target price changes

Current ______ TP ________ Rating Upside/ Company Ticker Currency price Old New downside Etisalat ETISALAT UH AED 19.95 14.60 15.85 Reduce -20.6% Mobily EEC AB SAR 28.61 25.00 25.00 Reduce -12.6% Ooredoo ORDS QD QAR 93.90 78.50 78.00 Reduce -16.9% STC STC AB SAR 64.19 79.50 82.00 Buy 27.7% Viva Kuwait VIVA KK KWD 0.94 0.81 0.77 Reduce -18.1% Vodafone Qatar VFQS QD QAR 11.25 9.25 8.00 Reduce -28.9% Zain Group ZAIN KK KWD 0.33 0.45 0.45 Buy 36.4% Zain KSA ZAINKSA AB SAR 8.03 N/A 6.35 Reduce -20.9%

Source: HSBC estimates, Thomson Reuters. Priced as of close at 21 July 2016

Competition: a zero-sum game of phones?

EQUITIES TELECOM

25 July 2016

2

Executive summary 3

Competition does not appear to

be abating 5

Company section 9

Etisalat (ETISALAT UH) 10

Financials & valuation: Etisalat 14

Mobily (EEC AB) 15

Financials & valuation: Etihad

Etisalat(Mobily) 18

Ooredoo (ORDS QD) 19

Financials & valuation: Ooredoo 24

Saudi Telecom Company (STC

AB) 25

Financials & valuation: Saudi

Telecom Company 30

Viva Kuwait (VIVA KK) 31

Financials & valuation: VIVA

KUWAIT 35

Vodafone Qatar (VFQS QD) 36

Financials & valuation: Vodafone

Qatar 40

Zain Group (ZAIN KK) 41

Financials & valuation: Zain Group 45

Zain KSA (ZAINKSA AB) 46

Financials & valuation: Zain KSA 60

Disclosure appendix 64

Disclaimer 67

Contents

3

EQUITIES TELECOM

25 July 2016

All eyes on competition

In this report, we look at the competitive landscape in the main GCC telecom markets. In

Kuwait, we are concerned by the increasingly generous data allowances, which are not

conducive to data monetisation. We think market shares in Qatar have stabilised and any

market share gains will be achieved through further ARPU erosion. In Saudi Arabia, Zain KSA’s

market share gains have been achieved through aggressive pricing. We expect competition in

the UAE to remain rational: telecoms operator du has achieved critical mass in terms of mobile

subscribers and may reassess its pricing strategy to drive profitability instead.

STC and Zain Group remain our only Buy-rated stocks in the region

STC is the dominant player in Saudi Arabia and is leveraging that position to increase cash

returns. The incumbent has benefited from the competition between Mobily and Zain KSA. In

the past year, STC has managed to consolidate its leadership by increasing market and

revenue share. We like its steady cash generation and un-geared balance sheet and, barring

any M&A activity, we think the group has the scope to increase dividends. We raise our TP to

SAR82 (from SAR79.50) in this report, mainly due to a higher DCF fair-value, implying 27.7%

upside.

Our Buy case on Zain Group remains a valuation call. The current share price effectively

ascribes nil value to Iraq and Sudan. We think this is unjustified as both operations remain cash

generative despite the geopolitical risks. Zain Group’s dividend yield (c12% in 2017e) and free

cashflow yield (c26%) should provide support. We also note that the stock trades significantly

below EEMEA sector averages. Zain Group trades on 2017e EV/EBITDA of 2.9x versus the

EEMEA average at 4.4x. On 2017e PE, Zain Group trades at 6.1x against an EEMEA average

of 10.3x. We keep our KWD0.45 TP unchanged, which implies 36.4% upside.

We maintain our ratings across our coverage, have a Reduce rating on Zain KSA (on which we

initiated today in a separate report), and revise our TPs (with the exception of Mobily’s and Zain

Group’s), mainly on estimate changes.

Executive summary

In highly penetrated markets, subscriber gains are now a zero-sum

game barring population growth

Operators have indiscriminately used pricing to attract/retain

subscribers thus eroding value

We revise our TPs on new estimates; STC and Zain Group remain

our top picks in the region

EQUITIES TELECOM

25 July 2016

4

GCC Telecoms: valuation changes

Old New Reason for TP Company Currency TP TP change Rating

Etisalat AED 14.60 15.85 Estimate changes Reduce Mobily SAR 25.0 25.0 No change Reduce Ooredoo QAR 78.50 78.00 Estimate changes Reduce STC SAR 79.50 82.00 Estimate changes Buy Viva Kuwait KWD 0.81 0.77 Estimate changes Reduce Vodafone Qatar QAR 9.25 8.00 Estimate changes Reduce Zain Group KWD 0.45 0.45 No change Buy Zain KSA SAR N/A 6.35 Initiation Reduce

Source: HSBC estimates

Today we initiated on Zain KSA at Reduce with a SAR6.35 TP

We initiated on Zain KSA in our report, also published today, Recapitalisation and dilution seem

unavoidable. Since its entry in the Saudi mobile market, Zain KSA’s market share gains have

been achieved through aggressive pricing. Cash generation has been low because of this, and

due to disproportionate spend on sales & marketing. The company’s growth has been

hampered by the cost of its telecoms license (SAR22.9bn / USD6.1bn) and a debt-heavy capital

structure. Net interest expenses represent half of EBITDA and have been in large part

responsible for the delay in reaching net profitability, in our view. We do not think a tower

disposal is the solution. Over our 2016-18 forecast period, we estimate Zain KSA will generate

cumulative free cash-flow of SAR 975m (against net debt of SAR14bn). As such, we think

another a recapitalisation (through a rights issue or debt swap) seems unavoidable. In either

case, minority shareholder stakes would be diluted by nearly half.

Peer comparison

Company Ticker Analyst Rating Ccy Last Target Up/down ___ EV/EBITDA ____ _______ P/E ________ ____ Div. yield _____ price price side, % 2016e 2017e 2016e 2017e 2016e 2017e

Etisalat ETEL.AD Eric Chang Reduce AED 19.95 15.85 -20.6% 6.3 6.0 22.8 22.4 4.3% 4.5% Mobily 7020.SE Eric Chang Reduce SAR 28.61 25.00 -12.6% 7.9 6.7 nm 50.1 0.0% 0.0% Ooredoo ORDS.QA Eric Chang Reduce QAR 93.90 78.00 -16.9% 5.2 4.8 14.8 13.0 3.2% 3.5% STC 7010.SE Eric Chang Buy SAR 64.19 82.00 27.7% 5.8 5.5 13.5 12.5 6.6% 7.0% Viva Kuwait VIVA.KW Eric Chang Reduce KWD 0.94 0.77 -18.1% 4.0 3.8 16.0 10.8 0.0% 0.0% Vodafone Qatar VFQS.QA Eric Chang Reduce QAR 11.25 8.00 -28.9% 26.0 21.8 0.0 0.0 0.0% 0.0% Zain Group ZAIN.KW Eric Chang Buy KWD 0.33 0.45 36.4% 3.3 2.9 7.4 6.1 9.1% 12.1% Zain KSA 7030.SE Eric Chang Reduce SAR 8.03 6.35 -20.9% 9.0 7.5 0.0 0.0 0.0% 0.0% GCC 6.0 5.8 10.5 11.7 1.6% 1.7% Global Telecom GLTDq.L Herve Drouet Buy USD 1.77 2.40 35.6% 3.2 2.6 12.1 8.5 0.0% 0.0% Magyar Telekom MTEL.BU Herve Drouet Buy HUF 444.00 500.00 12.6% 4.6 4.3 13.2 11.0 5.6% 5.6% Megafon MFON.MM Herve Drouet Hold RUB 688.00 770.00 11.9% 4.4 4.4 10.0 9.7 9.4% 9.4% MTS MTSS.MM Herve Drouet Buy RUB 244.30 280.00 14.6% 4.2 3.8 8.2 7.0 9.7% 10.0% O2 CZ SPTT.PR Herve Drouet Hold CZK 234.40 240.00 2.4% 7.4 7.2 15.0 14.3 6.7% 7.0% Rostelecom ROSYY.PK Herve Drouet Hold USD 8.13 8.40 3.3% 3.0 2.8 12.9 9.8 6.9% 6.9% Turk Telekom TTKOM.IS Herve Drouet Buy TRY 5.80 7.30 25.9% 4.9 4.4 11.0 8.0 8.6% 11.5% Turkcell TCELL.IS Herve Drouet Hold TRY 10.21 12.00 17.5% 5.2 4.8 9.8 8.5 7.0% 6.9% VimpelCom Ltd VIP.OQ Herve Drouet Buy USD 4.14 5.90 42.5% 4.2 4.0 11.2 13.1 0.8% 3.8% EE 4.4 4.3 11.6 9.8 6.8% 6.9% MTN Group MTNJ.J Herve Drouet Buy ZAR 144.88 176.00 21.5% 3.8 3.5 11.2 9.7 4.8% 5.3% Telkom SA TKGJ.J Herve Drouet Reduce ZAR 64.50 51.00 -20.9% 3.1 2.9 13.9 10.3 4.9% 5.7% Vodacom Group VODJ.J Ziyad Joosub Buy ZAR 166.20 175.00 5.3% 8.8 8.2 19.3 16.8 4.8% 5.4% Africa 3.8 3.5 13.9 10.3 4.8% 5.4% EEMEA average 4.6 4.4 12.1 10.3 4.8% 5.4%

Source: HSBC estimates, price as on 21 July 2016

5

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25 July 2016

In this section, we look at the competitive landscape in the main GCC telecom markets. In

Kuwait, we are concerned by the increasingly generous data allowances, which are not

conducive to data monetisation. We think market shares in Qatar have stabilised and any

market share gains will be achieved through further ARPU erosion. In Saudi Arabia, Zain KSA’s

market share gains have been achieved through aggressive pricing. We expect competition in

the UAE to remain rational. du has achieved a critical mass in terms of mobile subscribers and

could reassess its pricing strategy to drive profitability instead.

Kuwait: no end in sight for competition

Prior to Viva’s entry into the market, Zain Group and Ooredoo enjoyed a comfortable duopoly,

but since Viva’s launch in summer 2008, competition has been fierce. The third mobile operator

has significantly changed the competitive landscape.

Whilst Zain Group has maintained leadership, its market share has dropped from 57% in Q3

2008 to 38% in Q1 2016. Ooredoo’s market share declined from 43% to 31% over the same

period and it has lost its second place (in terms of subscriber and revenue share) in 2013. At

present, the number two and three players have equal market share of c30%.

Both incumbents have seen their ARPU more than halve

since Viva’s entry

The intensity of competition is more apparent when looking at ARPU. Both incumbents have

seen their ARPU more than halve, with Zain Group’s falling from USD71 in Q3 2008 to USD28

in Q1 2016, and Ooredoo’s dropping from USD53 to USD19 over the same period.

Competition does not appear

to be abating

In highly penetrated markets, subscriber gains are now a zero-sum

game, barring population growth

Operators have indiscriminately used pricing to attract/retain

subscribers

On a relative basis, the UAE is the most rational market in the Gulf

EQUITIES TELECOM

25 July 2016

6

We have a negative outlook for 2016. We are concerned by the increasingly generous data

allowances on postpaid and prepaid tariffs. We expect a close fight for second position, with

Zain Group and Ooredoo’s ARPU likely declining, and Viva’s growing at low single-digits.

Viva’s aggressive marketing has seduced one-third of mobile subscribers…

… and has severely eroded ARPUs (KWD)

Source: Company data, HSBC calculations Source: Company data, HSBC calculations

In Qatar, we are concerned that any market share gains will be achieved through further ARPU erosion

Vodafone Qatar became the country’s second operator in 2009 and broke Ooredoo’s monopoly.

In four years, it steadily gained market share to reach 30% of mobile subscribers, but in the

second half of 2014, Ooredoo reasserted its grip on the domestic mobile market as it sought to

offset a weaker operating environment in some of its international operations. The price war was

primarily aimed at the pre-paid and international segments.

Since Q3 2014, both operators have seen steady decline in ARPU as competition has taken its

toll. Whereas earlier this year, we had seen signs of moderating competitive intensity, we now

expect competitive pressures to persist. Ooredoo has not experienced y-o-y ARPU growth since

Q4 2012 and Vodafone Qatar has had six consecutive quarters of y-o-y ARPU decline.

2015 was particularly weak for Vodafone Qatar. Ooredoo’s price war significantly impacted its

competitors’ ARPU but more worryingly, Vodafone Qatar’s ARPU discount to Ooredoo’s has

widened. Vodafone Qatar, which is the smaller operator, has had four consecutive quarters of y-

o-y revenue decline and seen its EBITDA margin contract. Given it has c30% subscriber and

revenue share, we think any increase in market share would be achieved through further ARPU

dilution, which would hamper the way to profitability.

Vodafone’s market share plateauing at 35%...

…which could pressure ARPU (QAR) further if it wants to increase market share


0%

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Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16

Zain ORDS VIVA

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ZAIN ORDS VIVA

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ORDS VFQS

We believe any increase in

Vodafone Qatar’s market

share will be achieved

through further ARPU

dilution, which would hamper

the way to profitability

7

EQUITIES TELECOM

25 July 2016

Saudi Arabia: Zain Group needs to focus on profitability

Saudi Arabia remains a contested market. The past year has seen a significant shift in the mobile

landscape. Mobily, once a formidable player with 38% market share, has seen its share fall to 27%

since the accounting scandal that came to light in November 2014. STC has consolidated its

leadership in the high-value segment and Zain Group and the MVNOs (Virgin Mobile, Lebara)

have increased their market share at the lower end with an aggregate share of 26%.

However, Zain Group’s market share gains have been achieved through aggressive pricing, with

its ARPU declining steadily in the past three years, reaching SAR49 in Q1 2016 (from SAR67 in

Q1 2013). In contrast, Mobily has focused on profitability: we highlight Q1 2015 as an inflection

point.

While Mobily was going through accounting issues, Zain Group gained market share …

… through ARPU (in SAR) erosion


The CITC (the Saudi telecoms regulator) has cut mobile termination rates (MTR) by 60%. In

April 2015, the regulator introduced the first reduction in six years by cutting MTR by 40% to

SAR 0.15/mn. In Q2 this year, it cut MTR further, by a third to SAR0.10/mn. We highlight MTR

reductions are most beneficial to the operator with the least subscribers. Zain Group has

dropped its prepaid voice tariffs, which are now lower than STC’s, potentially allowing it to

attract more subscribers.

As the biometric subscriber identification nears completion, we would expect Mobily to be able

to stem its market share losses and regain subscribers. We see Zain Group increasing its

market share marginally, through lower tariffs.

The UAE is the most rational market in the Gulf

As mobile penetration approaches 200%, the UAE mobile market now looks largely mature, with

market shares settling at around 55% for Etisalat and 45% for Du. We do not see this changing

materially.

Over the past quarters, Etisalat has performed strongly in the post-paid segment, which now

accounts for over 18% of its subscriber base. This segment is generally more defensive than

pre-paid. This becomes especially critical in a mature market where price and value becomes

the key driver for subscriber base.

0%

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STC EEC ZAIN MVNO

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STC EEC ZAINKSA

In the last year, the telecoms

regulator has cut mobile

termination rates by 60%

EQUITIES TELECOM

25 July 2016

8

Since 2012, the increase in mobile penetration rates has coincided with ARPU reduction for

both operators, albeit Etisalat has experienced a slower rate of decline. Since the beginning of

2014, Etisalat’s ARPU has declined by 4% and du’s by 12%. We attribute the difference to

Etisalat’s higher proportion of high-value subscribers. We expect competition to remain rational:

du has achieved critical mass in terms of mobile subscribers and could reassess its pricing

strategy to drive profitability instead.

du has achieved a critical mobile subscriber base…

… but at a lower ARPU (AED) than Etisalat


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ETISALAT DU

9

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25 July 2016

Company section

EQUITIES TELECOM

25 July 2016

10

The UAE is the most rational market in the Gulf

As mobile penetration approaches 200%, the UAE mobile market now looks largely mature.

Revenue growth will largely depend on data pricing and we do not expect market shares to

materially change as Etisalat and Du settle at 55% and 45% respectively. Since 2012, the

increase in mobile penetration rates has coincided with an ARPU reduction for both operators.

However, Etisalat has experienced a slower rate of decline, which we attribute to a higher

proportion of high-value subscribers. We expect competition to remain rational. Du has

achieved a critical mass in terms of mobile subscribers and could reassess its pricing strategy to

instead drive profitability.

UAE and Morocco remain highly cash generative

Etisalat’s key attraction in our view is its strong cash generation in the UAE and Morocco. It is

the incumbent in both markets, with advantageous market positions (as evidenced by EBITDA

margins in excess of 50%). That cash can either be reinvested into growth markets or paid out

as dividends. Moreover, it operates in economies that should be able to weather falling oil price

receipts better than others.

While international operations have scope for improvements

In May, there were reports in the media (MEED) that Etisalat was planning to create a holding

company with separate UAE and international units (see our 24 May 2016 report What is the

purpose of creating a HoldCo?). The company did not comment. In our view, Etisalat is not

seeking to list its international unit but intends to improve operating and financial performance:

there have been key appointments since the beginning of the year: Daniel Ritz (Etisalat’s Group

Head of Strategy) was appointed CEO of PTCL (an integrated telecoms operator in Pakistan).

More recently, the Group’s COO Hatem Dowidar was promoted CEO of Etisalat International.

We see these moves as an indication of the group’s intention to drive the performance of its

sprawling international operations.

Valuation is diverging from fundamentals. Maintain Reduce with TP of AED15.85 (from

AED14.60)

Etisalat shares are up 24% year-to-date (in absolute terms) and trade at 6.0x 2017e EBITDA

(EEMEA average: 4.4x) and 22.4x 2017e earnings (EEMEA average 10.3x). At the current

share price, the market assumes margins at the international operations will converge

straightaway with those in the UAE and Morocco. We do not share this view. We believe

Etisalat is in very capable hands but optimising efficiency and cost structure is not an overnight

affair. We maintain our Reduce rating but increase TP to AED15.85. The increase is driven

mainly by an increase in our net debt assumptions (detailed below) as we roll forward our

valuation to 2017e. Our new target price implies 20.6% downside.

Etisalat (ETISALAT UH)

Solid management team, strong cash-generating assets…

…but valuation has shot ahead of fundamentals

Maintain Reduce, increase TP to AED15.85 (from AED14.60)

11

EQUITIES TELECOM

25 July 2016

Estimate changes

We have made minor adjustments to our estimates to reflect Q1 2016 actuals. Our estimate

changes for 2017e and 2018e are mainly driven by Maroc Telecom where we increase

revenues and EBITDA by c4%.

Etisalat: Changes in estimates

___________ New ____________ _________ Previous __________ _________ Difference __________ AED m 2016e 2017e 2018e 2016e 2017e 2018e 2016e 2017e 2018e

Revenue 51,329 53,871 56,300 50,726 53,311 55,629 1.2% 1.0% 1.2% EBITDA 24,970 25,843 26,976 24,908 25,933 27,052 0.2% -0.3% -0.3% Margin % 48.6% 48.0% 47.9% 49.1% 48.6% 48.6% -0.5% -0.7% -0.7% Net profit 7,592 7,750 8,146 7,395 7,760 8,183 2.7% -0.1% -0.5% DPS, AED 0.85 0.90 0.95 0.85 0.90 0.95 0.0% 0.0% 0.0% CapEx -8,933 -10,245 -10,612 -11,531 -10,658 -10,805 -22.5% -3.9% -1.8% % revenues 17.4% 19.0% 18.8% 22.7% 20.0% 19.4% -5.3% -1.0% -0.6% Net debt (cash) -9,702 -9,445 -8,606 1,608 2,720 3,751 nm nm nm


Valuation and risks

Valuation

We value Etisalat using a sum-of-the-parts method, rolling forward our valuation to 2017e. We

have lowered our target multiples for Maroc Telecom (IAM MC, MAD126, NR) from 6x to 5x on

account of greater competition in its key markets. We have updated the sum-of-the-parts with

the current market value of PTCL (PTCA PK, PKR16.03, NR). We increase our Etisalat target

price from AED14.60 to AED15.85. The increase is mainly driven by lower net debt estimates

which we have revised based on lower capex. Our AED15.85 TP implies 20.6% downside and

we maintain our Reduce rating.

Sum-of-the-parts

EBITDA EV % EV % EV Method 2017e /EBITDA stake (current) of EV (previous)

UAE 14,997 6.0x 100.0% 89,983 70.2% 92,552 Multiple Maroc Telecom 6,729 5.0x 48.4% 16,285 15.2% 17,154 Multiple Egypt 2,139 5.5x 66.0% 7,765 6.1% 6,483 Multiple PTCL 1,656 2.8x 23.4% 1,070 0.8% 810 Market value Asia 322 3.0x 100.0% 965 0.8% 934 Multiple Subsidiaries 116,068 117,934 Mobily 5,232 27.0% 5,088 4.0% 5,088 HSBC Target

price (SAR25) Nigeria 1,742 5.0x 40.0% 3,484 2.7% 2,099 Multiple Associates 8,572 7,187 Other interests 264 0.2% 357 EV 124,904 125,478 Debt 22,125 22,100 Cash -31,827 -20,491 Adj. for minority's debt -3,315 -3,315 Net debt -13,017 Equity value 137,920 Issued shares (m) 8,696.75 FV (AED) 15.85 Current share price 19.95 Upside/downside -20.6%

Current price is as of close 21 July 2016 Source: HSBC estimates

EQUITIES TELECOM

25 July 2016

12

As a cross-reference, we detail below the valuation multiples implied at our target price.

Implied valuation at our AED15.85 target price

2016e 2017e 2018e

Etisalat P/E 15.3x 14.6x 13.7x EV / EBITDA 5.1x 5.0x 4.8x Dividend yield 5.4% 5.7% 6.0% EEMEA average P/E 12.1x 10.3x 10.2x EV / EBITDA 4.6x 4.4x 4.0x Dividend yield 4.8% 5.4% 5.7%

Source: Current price is as of close 21 July 2016 Source: HSBC estimates

Etisalat was the best performing telecom stock in the MENA region last year (+62%). It remains

a strong performer again in 2016 (+24% y-t-d). The company has been steadily diverging from

its long-term averages in terms of EV/EBITDA and P/E.

Etisalat: EV/EBITDA Etisalat: P/E

Source: Bloomberg Source: Bloomberg

Risks

Key upside risks include:

Competition easing in Morocco, Egypt and Pakistan.

Mobily achieving a quicker-than-expected turnaround.

Formal dividend policy. The UAE stock market is essentially driven by retail investors who view

dividends as very important. Currently, Etisalat pays dividends on a half-yearly basis with a

stable increase. We think a move to a quarterly dividend would be positively received.

Any further easing of foreign ownership for the company. As a reminder, foreign ownership

limit is set at 20% but foreign investors cannot exert any voting rights.

A weakening of the USD would have a positive FX impact on Etisalat's earnings as half its

revenues are non-dollar pegged.

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Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

EV/EBITDA +1Y avg -5Y

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EQUITIES TELECOM

25 July 2016

Etisalat in charts

The UAE and Maroc Telecom are key revenue drivers (2015)

We expect competition to pressure earnings and margins (AEDm)

Source: Company data Source: Company data, HSBC estimates

Nevertheless Etisalat remains highly cash generative and has scope to increase dividends…

…although the market does not seem to price that in

Source: Company data, HSBC estimates Source: Bloomberg

56%

23%

21%

UAE IAM Other

46%

47%

48%

49%

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52%

0

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2013 2014 2015 2016e 2017e 2018e

EBITDA Margin

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8%

10%

2013 2014 2015 2016e 2017e 2018e

FCF yield Dividend yield

4

5

6

7

8


DIV YLD +1Y avg -5Y

EQUITIES TELECOM

25 July 2016

14

Financial statements

Year to 12/2015a 12/2016e 12/2017e 12/2018e

Profit & loss summary (AEDm)

Revenue 51,737 51,329 53,871 56,300

EBITDA 26,526 24,970 25,843 26,976

Depreciation & amortisation -7,581 -7,658 -7,817 -8,142

Operating profit/EBIT 18,945 17,312 18,026 18,834

Net interest -296 100 -102 -104

PBT 10,789 9,729 10,218 10,866

HSBC PBT 12,278 9,746 10,218 10,866

Taxation -1,278 -730 -766 -815

Net profit 8,263 7,592 7,750 8,146

HSBC net profit 9,753 7,608 7,750 8,146

Cash flow summary (AEDm)

Cash flow from operations 27,527 34,361 26,558 27,196

Capex -10,351 -8,933 -10,245 -10,612

Cash flow from investment -10,571 -8,933 -10,245 -10,612

Dividends -8,164 -7,011 -7,827 -8,262

Change in net debt -3,033 -10,379 257 839

FCF equity 15,603 24,798 15,444 15,665

Balance sheet summary (AEDm)

Intangible fixed assets 31,771 31,548 31,102 30,606

Tangible fixed assets 46,270 46,836 49,711 52,677

Current assets 42,203 43,533 43,761 43,189

Cash & others 21,422 31,827 31,570 30,731

Total assets 128,265 130,237 133,062 135,339

Operating liabilities 44,663 44,707 45,908 46,395

Gross debt 22,100 22,125 22,125 22,125

Net debt 677 -9,702 -9,445 -8,606

Shareholders' funds 43,489 43,917 43,840 43,725

Invested capital 54,158 45,383 47,097 49,348

Ratio, growth and per share analysis

Year to 12/2015a 12/2016e 12/2017e 12/2018e

Y-o-y % change

Revenue 6.1 -0.8 5.0 4.5

EBITDA 13.5 -5.9 3.5 4.4

Operating profit 18.2 -8.6 4.1 4.5

PBT -2.0 -9.8 5.0 6.3

HSBC EPS -5.3 -22.0 1.9 5.1

Ratios (%)

Revenue/IC (x) 0.9 1.0 1.2 1.2

ROIC 33.0 35.5 39.6 39.4

ROE 22.7 17.4 17.7 18.6

ROA 8.2 7.2 7.4 7.7

EBITDA margin 51.3 48.6 48.0 47.9

Operating profit margin 36.6 33.7 33.5 33.5

EBITDA/net interest (x) 89.6 252.5 260.3

Net debt/equity 1.1 -15.9 -15.1 -13.4

Net debt/EBITDA (x) 0.0 -0.4 -0.4 -0.3

CF from operations/net debt 4063.6

Per share data (AED)

EPS Rep (diluted) 0.95 0.87 0.89 0.94

HSBC EPS (diluted) 1.12 0.87 0.89 0.94

DPS 0.80 0.85 0.90 0.95

Book value 5.00 5.05 5.04 5.03

Valuation data

Year to 12/2015a 12/2016e 12/2017e 12/2018e

EV/sales 3.2 3.0 2.9 2.8

EV/EBITDA 6.3 6.3 6.0 5.8

EV/IC 3.1 3.4 3.3 3.2

PE* 17.8 22.8 22.4 21.3

PB 4.0 4.0 4.0 4.0

FCF yield (%) 9.4 15.0 9.3 9.5

Dividend yield (%) 4.0 4.3 4.5 4.8

* Based on HSBC EPS (diluted)

Issuer information

Share price (AED) 19.95 Free float 40%

Target price (AED) 15.85 Sector Diversified Telecoms

Reuters (Equity) ETEL.AD Country United Arab Emirates

Bloomberg (Equity) ETISALAT UH Analyst Eric Chang

Market cap (USDm) 47,238 Contact 971 4 423 6554

Price relative

Source: HSBC Note: Priced at close of 21 Jul 2016

4.80

9.80

14.80

19.80

4.80

9.80

14.80

19.80

2014 2015 2016 2017

Etisalat Rel to DUBAI FINANCIAL MARKET INDEX

Financials & valuation: Etisalat Reduce

15

EQUITIES TELECOM

25 July 2016

Competition should gradually become rational

Mobily needs to improve profitability and repair its balance sheet, and a price war at this

juncture with Zain KSA would not be helpful. The past year has seen a significant shift in the

mobile landscape with Mobily, once a formidable player, seeing its market share fall from 38%

to 27% since the accounting scandal (see 11 January 2016 GCC Telecoms: Low oil price

environment calls for selectivity) In the meantime, Zain KSA’s share has increased 5ppt to 23%

since Q3 2014, albeit this has been achieved through aggressive pricing.

Mobily is in the midst of a turnaround strategy

Management’s stated priority is to deleverage, optimise efficiency/spending and monetising its

extensive telecom infrastructure. The challenge will be to execute against a backdrop of

deteriorating macro.

We note that in terms of efficiency, management has significantly slimmed down SG&A. Q1

2016 expenses were 21% lower than in the previous quarter. Management sees scope for

capex optimisation, which can be achieved by simplifying the telecom and IT networks,

improving network planning and increasing accountability on capex spend.

Management also wants to monetise its extensive telecoms infrastructure. Since incorporation,

the company has invested SAR35bn on fixed assets, including a FTTH network, a national fibre

network and data centres. A universal license (to provide fixed line services) would enable

Mobily to leverage the assets, but previous requests to the regulator have been turned down.

Deleveraging remains a priority

As at Q1 2016, Mobily had SAR 12.2bn of net debt, with SAR1.7bn due this year and a further

SAR3.2bn the following year. The company is considering a tower sale, and the financial media

(Bloomberg, 1 March 2016) have reported a transaction amount of USD2bn (SAR 7.9bn) which

would solve the issue of high gearing (the company has not commented on this figure). We also

highlight that Mobily has been in arbitration (since Q4 2014) with Zain KSA over SAR2.1bn of

receivables.

We maintain our Reduce rating and SAR25 TP

Despite significant progress, we still think the turnaround remains fraught with challenges, with

cSAR5bn of debt repayments due over the next 18 months on which the company needs to

renegotiate with its lenders amid a rising interest environment. New management has been

effective with cost control and now needs to show its mettle with revenue growth, which could

be achieved through subscriber gains and/or ARPU growth, although this is a difficult feat when

the latest entrant is grappling with the same issues. We maintain our Reduce rating and SAR25

target price. Our estimates are unchanged.

Mobily (EEC AB)

Competition in Saudi needs to become rational…

…if Mobily is to execute its turnaround strategy and deleverage

Challenges remain. We retain our Reduce rating and SAR25 TP

EQUITIES TELECOM

25 July 2016

16

Valuation and risks

We continue to value Mobily on a DCF. We make no changes to the assumptions underpinning

the WACC of 8.8%. We continue to use a long-term growth rate of 2%. We have calculated the

WACC based on a 10.2% cost of equity (risk-free rate of 3%, equity risk premium of 7.5% and a

beta of 1). Our unchanged SAR25 TP implies c12.6% downside and we maintain our Reduce

rating as we think the turnaround remains fraught with challenges.

Sensitivity analysis (SAR)

______________________________________ WACC ______________________________________ 7.75% 8.00% 8.25% 8.50% 8.76% 9.00% 9.25% 9.50% 9.75%

Long 1.0% 30.00 28.00 26.00 24.00 22.00 20.00 19.00 17.00 16.00 Term 1.5% 32.00 30.00 27.00 25.00 23.00 22.00 20.00 18.00 17.00 Growth 2.0% 35.00 32.00 30.00 27.00 25.00 23.00 22.00 20.00 18.00 Rate 2.5% 38.00 35.00 32.00 30.00 27.00 25.00 23.00 21.00 20.00 3.0% 42.00 39.00 35.00 33.00 30.00 27.00 25.00 23.00 21.00


As a cross-reference, we detail below the implied valuation multiples at our target price.

Mobily: implied valuation at our SAR25 target price

2016e 2017e 2018e

Mobily P/E nm 43.8x 15.7x EV / EBITDA 7.3x 6.2x 5.2x EEMEA average P/E 12.1x 10.3x 10.2x EV / EBITDA 4.6x 4.4x 4.0x


At 6.7x 2017e EV/EBITDA, Mobily trades around its long-term average multiple of 7x, which we

think is pricing in perfection given its ongoing turnaround. We have not included a P/E chart

because earnings losses in 2014 and 2015 render multiples not meaningful.

Mobily: EV/EBITDA

Source: Bloomberg

Risks


tower disposal;

Mobily gaining market share (from STC) on the ICT (Information and Communications

Technology) segment;

greater mobile broadband usage could be a catalyst for ARPU increases;

improved disclosures and corporate governance initiatives could increase investor

confidence.

2

3

4

5

6

7

8

9

10



17

EQUITIES TELECOM

25 July 2016

Mobily in charts

Over the past year, Mobily has lost market share…

… and revenue share


It stopped cutting tariffs (ARPU in SAR)… … to enhance profitability (EBITDA in SARm)

Source: HSBC calculations Source: Company data, HSBC estimates

… and address elevated debt (in SARbn)

Source: Company data, HSBC estimates

0%

10%

20%

30%

40%

50%


STC EEC ZAIN MVNO

0%

10%

20%

30%

40%

50%

60%

70%

Mar-10 Apr-11 May-12 Jun-13 Jul-14 Aug-15

STC EEC ZAINKSA

40

60

80

100

120

140


STC EEC ZAINKSA

0%

10%

20%

30%

40%

50%

0

2,000

4,000

6,000

8,000

10,000

12,000

2013 2014 2015 2016e 2017e 2018e

EBITDA Margin

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2012 2013 2014 2015 2016e 2017e 2018e

Net debt Net debt/EBITDA

EQUITIES TELECOM

25 July 2016

18


Year to 12/2015a 12/2016e 12/2017e 12/2018e

Profit & loss summary (SARm)

Revenue 14,424 14,391 16,487 18,022

EBITDA 2,941 4,595 5,394 6,140


Operating profit/EBIT -684 477 1,178 1,945

Net interest -240 -650 -727 -684

PBT -924 -173 451 1,261

HSBC PBT -924 -173 451 1,261

Taxation -169 -17 -11 -32

Net profit -1,093 -191 440 1,230

HSBC net profit -1,093 -191 440 1,230

Cash flow summary (SARm)


Capex -3,573 -4,260 -3,551 -3,801


Dividends 0 0 0 0

Change in net debt -1,402 1,807 -378 -1,447

FCF equity 1,062 -1,820 373 1,443

Balance sheet summary (SARm)



Current assets 8,398 8,147 8,305 8,977

Cash & others 1,748 418 534 574

Total assets 42,376 42,266 41,759 42,036


Gross debt 14,275 14,752 14,491 13,084

Net debt 12,527 14,335 13,957 12,510




Year to 12/2015a 12/2016e 12/2017e 12/2018e

Y-o-y % change

Revenue 3.1 -0.2 14.6 9.3

EBITDA 5.9 56.2 17.4 13.8

Operating profit 147.0 65.2

PBT 179.8

HSBC EPS 179.8

Ratios (%)

Revenue/IC (x) 0.5 0.5 0.6 0.6

ROIC -0.3 3.9 5.6 8.1

ROE -6.6 -1.2 2.8 7.5

ROA -1.5 1.3 2.7 4.5

EBITDA margin 20.4 31.9 32.7 34.1

Operating profit margin -4.7 3.3 7.1 10.8

EBITDA/net interest (x) 12.2 7.1 7.4 9.0

Net debt/equity 80.5 93.3 88.3 73.4

Net debt/EBITDA (x) 4.3 3.1 2.6 2.0

CF from operations/net debt 40.3 21.7 33.4 47.6

Per share data (SAR)

EPS Rep (diluted) -1.42 -0.25 0.57 1.60

HSBC EPS (diluted) -1.42 -0.25 0.57 1.60

DPS 0.00 0.00 0.00 0.00

Book value 20.21 19.96 20.53 22.13

Valuation data

Year to 12/2015a 12/2016e 12/2017e 12/2018e

EV/sales 2.4 2.5 2.2 1.9

EV/EBITDA 11.7 7.9 6.7 5.6

EV/IC 1.2 1.2 1.2 1.2

PE* nm nm 50.1 17.9

PB 1.4 1.4 1.4 1.3

FCF yield (%) 4.8 -8.3 1.7 6.6

Dividend yield (%) 0.0 0.0 0.0 0.0


Issuer information

Share price (SAR) 28.61 Free float 61%

Target price (SAR) 25.00 Sector Wireless Telecoms

Reuters (Equity) 7020.SE Country Saudi Arabia

Bloomberg (Equity) EEC AB Analyst Eric Chang


Price relative


9.90

29.90

49.90

69.90

89.90

109.90

9.90

29.90

49.90

69.90

89.90

109.90

2014 2015 2016 2017

Etihad Etisalat(Mobily) Rel to TADAWUL ALL SHARE INDEX

Financials & valuation: Etihad Etisalat(Mobily) Reduce

19

EQUITIES TELECOM

25 July 2016

Competition remains elevated in its key markets…

Ooredoo’s main earnings drivers are Qatar, Indonesia, Iraq and Algeria, together representing

over 75% of 2015 revenues and EBITDA. In Qatar, Ooredoo and Vodafone Qatar have both

experienced steady ARPU decline since Q3 2014. Earlier this year, there had seen signs of

moderating competitive intensity; however we now expect competitive pressures to remain (we

look at the reasons in greater detail in the Vodafone Qatar section of this report). HSBC’s Asia

telecoms analysts expect competition in Indonesia to stabilise rather than intensify, with the

growth of 4G benefiting the large three telecom companies (PT Telkom TLKM IJ, IDR 4,120,

Hold Indosat ISAT IJ, IDR6,900, Hold, XL Axiata EXCL IJ IDR 3,670, Hold) which have invested

more quickly in network upgrades than their smaller peers (see Indonesia Telcos: Turning

positive, 11 May 2016, Neale Anderson). Competition remains elevated in Iraq and Algeria – in

Algeria, Ooredoo is preparing for 4G launch by year-end, just two years after the 3G launch. In

Iraq, VAT implementation in August 2015 introduced some pricing discipline in the second half.

… key currencies have stabilised but F/X risks remains …

Ooredoo has high FX exposure to non-dollar pegged currencies, which generated 61% of group

revenues and 42% of EBITDA in 2015. Last year was especially challenging for Ooredoo as a

number of currencies weakened against the Qatari Riyal. Ooredoo’s main FX exposure is to the

Indonesian Rupiah (IDR), Iraqi Dinar (IQD), Algerian Dinar (DZD) and Tunisian Dinar (TND).

Despite some improvement year-to-date, these currencies may continue to pose a FX risk to

Ooredoo.

… Capital intensity will remain high, limiting free cash-flow and dividend increases

Despite trimming our capex estimates by 7% on average, we still expect capital intensity to

remain high (c20% of revenues). In fact, Ooredoo’s capex intensity (capex to revenue ratio) is

among the highest of the GCC telecom operators. We believe this will limit cash generation and

hence dividend increases.

Maintain Reduce, adjust to TP to QAR78.0 (from QAR78.5)

We continue to value Ooredoo on a sum-of-the-parts and apply target multiples as we roll our

valuation forward to our 2017e. We adjusted our TP slightly, to QAR78 (from QAR78.50) on

higher net debt estimates. Our target price implies 16.9% downside and we maintain our

Reduce rating as Ooredoo appears more focused on network investments than increasing

dividends. We see four downside risks to Ooredoo’s cash generation: competition, macro,

security and currency.

Ooredoo (ORDS QD)

Competition and capex intensity remain elevated…

… thus limiting free cash-flow and dividend increases

Maintain Reduce rating and adjust TP slightly, to QAR78 (from

QAR78.50)

EQUITIES TELECOM

25 July 2016

20

Estimates changes

We update our estimates to reflect the Q1 2016 results. The main change to our forecast is in

capex estimates, which we cut by c7% for 2016-18, mainly driven by Indosat, which has

completed its network modernisation. We leave our dividends expectations unchanged as

Ooredoo appears more focused on network investments than increasing dividends. In 2015, the

operator cut dividends per share by 25% to QAR3 while net profit was essentially flat y-o-y.

Ooredoo: Change in estimates, QARm

___________ New ____________ _________ Previous __________ _________ Difference __________ 2016e 2017e 2018e 2016e 2017e 2018e 2016e 2017e 2018e

Revenue 33,144 34,326 35,876 32,658 33,463 34,791 1.5% 2.6% 3.1% EBITDA 12,948 13,378 13,903 12,526 12,833 13,360 3.4% 4.2% 4.1% margin 39.1% 39.0% 38.8% 38.4% 38.3% 38.4% 0.7% 0.6% 0.4% Net profit 2,026 2,319 2,744 1,905 2,100 2,536 6.4% 10.4% 8.2% DPS, QAR 3.00 3.25 4.25 3.00 3.25 4.25 0.0% 0.0% 0.0% Capex -7,285 -7,064 -7,052 -7,902 -7,601 -7,487 -7.8% -7.1% -5.8% % revenue 22.0% 20.6% 19.7% 24.2% 22.7% 21.5% -2.2% -2.1% -1.9%


Valuation and risks

We value Ooredoo on a sum-of-the-parts and roll our valuation forward to 2017 estimates. Due

to higher net debt assumptions, as detailed below, our target price comes down marginally, from

QAR78.50 to QAR78, implying 16.9% downside, and we retain our Reduce rating as Ooredoo

appears more focused on network investments than increasing dividends.

In Qatar, Ooredoo’s market leadership is uncontested. We nevertheless see potential

downside to profitability and cash generation and we use a target multiple of 5.5x 2017e

EBITDA (6x 2016e previously).

We value the Indosat stake at HSBC’s target price of IDR7,300 (IDR5,100 previously, see

covering analyst Neale Anderson’s 11 May 2016 report Indonesia Telcos: Turning positive).

We value Algeria, Kuwait, Oman, Palestine and Tunisia on 4x 2017e EBITDA. We have lowered

our target multiples in Kuwait (from 4.5x 2016e) due to the competitive intensity.

For Ooredoo’s operations in Iraq and the Maldives we assign a multiple of 3x 2017e

EBITDA (unchanged). This low multiple reflects: geopolitical instability in Iraq, greenfield

operations in Burma and limited growth prospects in Maldives.

We value Burma on 3x 2017e EBITDA (unchanged). Ooredoo and Telenor (TEL NO, NOK

148, Buy) have shown contrasting performance, despite launching their operations in the

country simultaneously. Telenor reached EBITDA profitability in Q1 2015 (three quarters

after commercial launch). We also note that Telenor’s operations turned OpFCF positive in

Q1 2016. Ooredoo is struggling with profitability, which we attribute to its lower market

share. The incumbent, MPT (not listed) has 46% market share, Telenor has 37% and

Ooredoo has 15%. Mobile penetration is approaching 80%. The government is looking to

auction a fourth license to an operator that would have to partner with a local investor. At

this stage, it appears unlikely that a new entrant will launch before 2017.

21

EQUITIES TELECOM

25 July 2016

Sum-of-the-parts

EBITDA EV % EV % EV Method 2017e /EBITDA stake New of EV Previous

Qatar 3,749 5.5x 100.0% 20,618 43.2% 24,005 Multiple Oman 1,501 4.0x 55.0% 3,303 6.9% 3,263 Multiple Iraq 2,409 3.0x 64.1% 4,633 9.7% 4,310 Multiple Indosat 3,374 4.5x 65.0% 9,934 20.8% 7,846 HSBC Target price IDR7,300 Burma 234 3.0x 100.0% 702 1.5% -526 Multiple Kuwait 504 4.0x 92.1% 1,859 3.9% 2,309 Multiple Algeria 1,454 4.0x 73.7% 4,287 9.0% 3,743 Multiple Tunisia 540 4.0x 84.1% 1,816 3.8% 1,462 Multiple Maldives 144 3.0x 92.1% 397 0.8% 263 Multiple Subsidiaries 47,547 46,674 Palestine 108 4.0x 44.6% 193 0.4% 134 Multiple Associates 193 134 EV 47,740 46,808 Debt 42,126 42,126 Cash -17,808 -18,880 Adj. for minorities’ debt

-1,539 -1,563

Net debt 22,779 21,683 Equity value 24,961 25,125 Issued shares (m) 320 FV (QAR) 78.00 Current share price 93.90 Upside/downside -16.9%

Current price is as of 21 July 2016 Source: HSBC estimates, Thomson Reuters Datastream

Ooredoo is the best performing (+25% YTD) of the telecom operator stocks within our GCC

coverage (vs average of +2.2% for our GCC telecom coverage). While not prohibitively

expensive, we find its dividend yield (HSBC 2017e: 3.5%) unexciting.

Ooredoo: EV/EBITDA Ooredoo: P/E


3

4

5

6



6

8

10

12

14

16


P/E +1Y avg -5Y

EQUITIES TELECOM

25 July 2016

22

As a cross reference, we detail below the valuation multiples implied at our target price.

Ooredoo: implied valuation at our QAR78 target price

2016e 2017e 2018e

Ooredoo P/E 12.3x 10.8x 9.1x EV/EBITDA 3.8x 3.5x 3.1x Dividend yield 3.8% 4.2% 5.4% EEMEA average P/E 12.1x 10.3x 10.2x EV/EBITDA 4.6x 4.4x 4.0x Dividend yield 4.8% 5.4% 5.7%


Risks


favourable FX movements (Algeria, Tunisia, Iraq and Indonesia represent 61% of revenues

and 42% of EBITDA in 2015);

maintaining market share in Qatar especially in (the high-value) post-paid segment;

positive geopolitical developments particularly in Iraq and Tunisia.

Valuation and risks Indosat (ISAT IJ, IDR7,050, Hold, TP IDR7,300)

We calculate a fair value target price of IDR7,300 for Indosat using a DCF based methodology.

We apply a cost of equity of 9.5%, a debt/capital ratio of 50% and a terminal growth rate of 1%.

This returns a WACC of 7.8%, and our target price of IDR7,300. We assume a cost of debt of

8%, reflecting Indosat’s relatively high interest payments. Our target price implies 3.5% potential

upside and we rate the shares Hold.

Downside risks: (1) Irrational competition in the market, if and when the operators shift their

focus back to subscriber market share acquisition; leading to lower levels of monetisation and

profitability. (2) Foreign exchange related weakness. This was an issue in 2015, and could

apply in 2016 if market volatility increases; 75% of debt was IDR denominated by end 2015. (3)

Revenue cannibalisation as customers switch from voice and SMS services to packet data.

Upside risks: (1) Improving brand in 4G services. Due to its recent network monetisation,

Indosat’s performance could improve faster than we expect. (2) Rational competition. A decline

in competition would result in improving revenue and margins. (3) Lower capex. The recent

network modernisation programme may result in lower capex than we forecast.

Neale Anderson* Analyst

The Hongkong and Shanghai Banking Corporation Limited

[email protected]

+852 2996 6716

* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations

23

EQUITIES TELECOM

25 July 2016

Ooredoo in charts

The most diversified operator in the GCC (2015 revenue split)

A sustainable leverage (QARbn)

Source: Company data, HSBC calculations Source: Company data, HSBC estimates

FCF yield would support higher dividends But markets appear unconvinced

Source: Company data, HSBC estimates Source: Bloomberg

Ooredoo remains committed to investing for the long term


24%

23%

15%

15%

18%

5%Qatar

Indonesia

Iraq

Other GCC

North Africa

Other 0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

0

5

10

15

20

25

30

2013 2014 2015 2016e 2017e 2018e

Net debt (cash) Net debt/EBITDA

0%

5%

10%

15%

2013 2014 2015 2016e 2017e 2018eFCF Dividend

2

3

4

5

6

7


DIV YLD +1Y avg -5Y

0%

5%

10%

15%

20%

25%

30%

2013 2014 2015 2016e 2017e 2018e

ROIC CapEx / Revenues

EQUITIES TELECOM

25 July 2016

24


Year to 12/2015a 12/2016e 12/2017e 12/2018e

Profit & loss summary (QARm)

Revenue 32,161 33,144 34,326 35,876

EBITDA 13,004 12,948 13,378 13,903



Net interest -2,017 -1,581 -1,490 -1,157

PBT 3,034 3,232 3,802 4,557

HSBC PBT 3,071 3,236 3,802 4,557

Taxation -740 -787 -925 -1,109

Net profit 2,118 2,026 2,319 2,744

HSBC net profit 2,155 2,030 2,319 2,744

Cash flow summary (QARm)


Capex -8,537 -7,285 -7,064 -7,052


Dividends -1,281 -961 -961 -1,041

Change in net debt -746 -36 -2,792 -3,316

FCF equity 1,774 2,926 3,614 4,173

Balance sheet summary (QARm)



Current assets 26,454 26,013 17,241 20,743

Cash & others 18,158 17,548 8,635 11,951

Total assets 94,152 95,418 85,626 87,991


Gross debt 42,772 42,126 30,421 30,421

Net debt 24,614 24,577 21,786 18,470




Year to 12/2015a 12/2016e 12/2017e 12/2018e

Y-o-y % change

Revenue -3.2 3.1 3.6 4.5

EBITDA 1.1 -0.4 3.3 3.9

Operating profit -3.3 -5.1 10.0 8.0

PBT -13.8 6.5 17.6 19.9

HSBC EPS 8.1 -5.8 14.2 18.3

Ratios (%)

Revenue/IC (x) 0.6 0.6 0.6 0.7

ROIC 9.6 9.3 9.9 10.7

ROE 9.5 9.1 9.8 11.0

ROA 4.2 4.1 4.7 5.1

EBITDA margin 40.4 39.1 39.0 38.8



Net debt/equity 86.8 82.2 68.7 54.6



Per share data (QAR)

EPS Rep (diluted) 6.61 6.33 7.24 8.57

HSBC EPS (diluted) 6.73 6.34 7.24 8.57

DPS 3.00 3.00 3.25 4.25

Book value 68.09 71.67 75.66 79.98

Valuation data

Year to 12/2015a 12/2016e 12/2017e 12/2018e

EV/sales 2.1 2.0 1.9 1.7

EV/EBITDA 5.1 5.2 4.8 4.4

EV/IC 1.3 1.2 1.2 1.2

PE* 14.0 14.8 13.0 11.0

PB 1.4 1.3 1.2 1.2

FCF yield (%) 4.2 6.9 8.5 9.9

Dividend yield (%) 3.2 3.2 3.5 4.5


Issuer information

Share price (QAR) 93.90 Free float 36%

Target price (QAR) 78.00 Sector Wireless Telecoms

Reuters (Equity) ORDS.QA Country Qatar

Bloomberg (Equity) ORDS QD Analyst Eric Chang


Price relative


47.00

67.00

87.00

107.00

127.00

147.00

167.00

47.00

67.00

87.00

107.00

127.00

147.00

167.00

2014 2015 2016 2017

Ooredoo Rel to DSM 20 INDEX

Financials & valuation: Ooredoo Reduce

25

EQUITIES TELECOM

25 July 2016

STC has been largely immune to competition in Saudi Arabia

STC, Saudi’s incumbent telco operator, has benefited from the competition between Mobily and

Zain KSA, managing to consolidate its leadership in the past year by increasing market and

revenue share. We think this is due a higher proportion of high-value postpaid subscribers.

Leadership in the domestic market is a key competitive advantage…

Mobile broadband has been the growth driver, with STC’s leadership in Saudi Arabia

constituting, in our view, a key competitive advantage. It has the highest share of post-paid

mobile customers (i.e. the high-value segment) and a near-monopoly on fixed line services, and

so remains a net beneficiary of data growth. The significant increase in data usage forces

operators to invest in network capacity and find ways to ease the burden on mobile networks

(e.g. offloading mobile data to Wi-Fi). We believe: (i) operators will require additional spectrum

and (ii) a strong fixed line network would complement the mobile network by easing the capacity

burden and improving quality of service.

… and sustains strong free cash flow generation

Market leadership is sustaining STC’s high profitability and strong free cash flow generation. In

our 2016-18 forecast period we expect net profit to grow at a 9% CAGR and free cash flow at

15%.

We note that STC’s unleveraged balance sheet (SAR22.5bn net cash position in Q1 2016)

gives it the means to invest in network capacity and spectrum freely. Its cash pile can be put to

use for acquisitions or dividend increase: we think there is scope for STC to pay dividends in

excess of our current estimates. In November 2015, the company announced a dividend policy

that commits to a minimum quarterly dividend of SAR1 per share.

Maintain Buy rating. Increase TP to SAR82 (from SAR79.50)

We value STC on the average of a sum-of-the parts and DCF valuation. We have increased the

target price from SAR79.50 to SAR82 (27.7% upside) on the back of a higher DCF valuation.

STC trades at 5.5x 2017e EBITDA (EEMEA average: 4.4x) and 12.5x 2017e EPS (EEMEA

average: 10.3x). Given the SAR’s peg, its 7% dividend yield is dollar-denominated.

Saudi Telecom Company

(STC AB)

Unlevered balance sheet and high cash generation…

…bodes well for STC’s dividend outlook

Maintain Buy, increase TP to SAR82 (from SAR79.50)

EQUITIES TELECOM

25 July 2016

26

Change in estimates

We lower our estimates to reflect the intensity of competition in the Saudi mobile market. While

STC has consolidated its leadership (in terms of subscribers, and subscriber and revenue

share), it has adjusted its pricing plans to remain competitive relative to Mobily and Zain Group.

Our dividend estimates are unchanged.

STC: Change in estimates

___________ New ____________ _________ Previous __________ _________ Difference __________ SAR m 2016e 2017e 2018e 2016e 2017e 2018e 2016e 2017e 2018e

Revenues 49,198 50,648 52,507 51,920 52,493 54,004 -5.2% -3.5% -2.8% EBITDA 17,981 18,983 19,806 20,671 20,451 20,544 -13.0% -7.2% -3.6% Margin 36.5% 37.5% 37.7% 39.8% 39.0% 38.0% -3.3% -1.5% -0.3% Net profit 9,011 10,282 11,162 11,961 11,795 11,976 -24.7% -12.8% -6.8% DPS 4.25 4.50 4.75 4.25 4.50 4.75 0.0% 0.0% 0.0% CapEx -8,193 -8,263 -8,541 -8,000 -8,135 -8,410 2.4% 1.6% 1.6% % revenue 16.7% 16.3% 16.3% 15.4% 15.5% 15.6% 1.2% 0.8% 0.7%


Valuation and risks

We value STC on the equally weighted average of a sum-of-parts and DCF valuation. The

higher DCF valuation is the main driver of the increase in target price to SAR82 (SAR79.50

previously). This implies 27.7% upside and we reiterate our Buy rating.

Summary valuation

___________ Fair value ____________ _____ Target price calculation ______ Weight current previous current Previous

DCF 50% 93.22 88.93 46.61 44.47 SOTP 50% 70.50 69.95 35.25 34.98 Fair value TP 82.00 79.44 Upside/downside 27.7%

Source: HSBC estimates Upside based on current price as of 21 July 2016

As a cross-reference, we detail below the valuation multiples implied by our target price.

STC: implied valuation at our SAR82 target price

2016e 2017e 2018e

STC P/E 17.7x 15.5x 14.3x EV / EBITDA 8.2x 7.8x 7.4x Dividend yield 5.2% 5.5% 5.8% EEMEA average P/E 12.1x 10.3x 10.2x EV / EBITDA 4.6x 4.4x 4.0x Dividend yield 4.8% 5.4% 5.7%


DCF

Our assumptions underlying the DCF valuation remain the same. We use a WACC of 6.9%

(risk-free rate of 3.0%, 7.5% equity-risk premium) and a 2% long-term growth rate. Our DCF

fair-value increased to SAR93.22 (from SAR 88.93) on a higher terminal-value EBITDA margin

of 32.7% (30.3% previously).

27

EQUITIES TELECOM

25 July 2016

DCF sensitivity analysis

______________________________________ WACC ______________________________________ 6.00% 6.25% 6.50% 6.75% 6.89% 7.25% 7.50% 7.75% 8.00%

0.5% 95.41 91.54 87.99 84.72 83.05 78.91 76.32 73.90 71.64 Long 1.0% 99.71 95.33 91.35 87.72 85.87 81.31 78.47 75.84 73.39 Term 1.5% 104.96 99.93 95.39 91.28 89.20 84.12 80.98 78.08 75.41 Growth 2.0% 111.54 105.61 100.33 95.59 93.22 87.46 83.94 80.72 77.77 Rate 2.5% 119.99 112.80 106.49 100.92 98.16 91.51 87.50 83.87 80.55 3.0% 131.25 122.20 114.42 107.67 104.36 96.52 91.85 87.67 83.90 3.5% 147.02 135.02 125.00 116.50 112.40 102.86 97.29 92.37 87.99


Sum-of-the-parts

We roll over our sum-of-the-parts valuation to 2017e and use the same target multiples as

previously to value Saudi Arabia (6x) and Bahrain (4x). We incorporate the Turk Telekom

(TTKOM TI, TRY5.80, Buy) stake at the HSBC target price of TRY7.30. We make the following

adjustments:

We value Maxis (MAXIS MK, MYR 6.06, Hold, covered by Neale Anderson) at HSBC’s

target price of MYR5.40. This is based on a cost of equity of 6.5% (a risk-free rate of 4%, a

risk premium of 3.5% and a beta of 0.7x and a terminal growth of 1%).

We incorporate the Viva Kuwait stake at our target price of KWD0.77 (which we cut in this

report, from KWD0.81). Please refer to the company section in this report for more details.

Sum-of-the-parts

EBITDA EV % EV % EV Method SARm 2017e /EBITDA stake (new) of EV (previous)

Saudi Arabia 18,156 6.0x 100.0% 108,934 87.2% 106,486 Multiple Kuwait 1,732 51.8% 1,237 1.0% 1,301 HSBC TP KWD0.77 Bahrain 564 4.0x 100.0% 2,258 1.8% 2,361 Multiple Subsidiaries 112,429 110,149 Turk Telecom 19.3% 6,360 5.1% 6,647 HSBC TP TRY7.3 Maxis 16.2% 6,078 4.9% 6,076 HSBC TP MYR5.4 Associates 12,439 12,723 EV 124,868 122,871 Debt 6,417 Cash -22,354 Adj. minority's debt -194 Net debt -16,130 Equity value 140,998 Issued shares (m) 2,000.0 FV (SAR) 70.50

Source: HSBC estimates, Thomson Reuters Datastream

EQUITIES TELECOM

25 July 2016

28

During Q2, STC traded within a SAR60-65 range. As the incumbent and market leader, its

share price has been more impacted by industry newsflow (mandatory mobile subscriber

campaign in Saudi Arabia, capping of GCC roaming charges, MTR reduction in Saudi Arabia)

than that of its competitors. On valuation, STC has been straying from its long-term average but

is not overtly expensive within an EEMEA context. STC trades at 5.5x 2017e EBITDA (EEMEA

average: 4.4x) and 12.5x 2017e EPS (EEMEA average: 10.3x). Its high single-digit dividend

yield lends support.

STC: EV/EBITDA STC: P/E


Risks

Key downside risks include:

An extended period of low oil prices would have a deeper impact on the Saudi economy

and telecom spending; higher competition in the mobile segment (from Zain KSA and the

MVNOs) and in the ICT segment (Mobily);

A further cut in termination rates in Saudi Arabia would impact revenues and margins as

STC is the leading operator in the country;

Given its significant net cash position, STC may indulge in dilutive M&A activity. We believe

the possibility is lower as the company seemed to have learnt from its past experience.

2

3

4

5

6

7

8



6

7

8

9

10

11

12

13


P/E +1Y avg -5Y

29

EQUITIES TELECOM

25 July 2016

STC in charts

High returns… …sustainable FCF yield …

Source: Company data. HSBC estimates Source: Company data. HSBC estimates

…a balance sheet with a net cash position (SARbn)…

… all support increasing dividends (%)

Source: Company data. HSBC estimates Source: Bloomberg

0%

5%

10%

15%

20%

25%

30%

35%

40%

2013 2014 2015 2016e 2017e 2018eROIC CapEx / Revenues

0%

2%

4%

6%

8%

10%

2013 2014 2015 2016e 2017e 2018e

FCF Dividend

0

5

10

15

20

25

2013 2014 2015e 2016e 2017e 2018e

3

4

5

6

7

8


DIV YLD +1Y avg -5Y

EQUITIES TELECOM

25 July 2016

30


Year to 12/2015a 12/2016e 12/2017e 12/2018e


Revenue 50,651 49,198 50,648 52,507

EBITDA 19,294 17,981 18,983 19,806



Net interest 208 225 -44 -62

PBT 10,486 9,938 11,304 12,215

HSBC PBT 10,992 9,779 10,578 11,430

Taxation -697 -657 -726 -784

Net profit 9,258 9,011 10,282 11,162

HSBC net profit 10,461 9,510 10,282 11,162



Capex -10,408 -8,193 -8,263 -8,541


Dividends -8,000 -8,000 -9,250 -9,375

Change in net debt -3,431 4,198 -314 -514

FCF equity 11,807 6,274 9,416 9,773




Current assets 43,464 38,005 38,631 38,378

Cash & others 27,781 22,354 21,268 20,382

Total assets 96,661 91,747 93,002 93,761


Gross debt 7,647 6,417 5,017 3,617

Net debt -20,134 -15,936 -16,250 -16,765




Year to 12/2015a 12/2016e 12/2017e 12/2018e

Y-o-y % change

Revenue 9.9 -2.9 2.9 3.7

EBITDA 1.7 -6.8 5.6 4.3

Operating profit 2.7 -12.8 10.5 6.6

PBT -14.2 -5.2 13.7 8.1

HSBC EPS -1.1 -9.1 8.1 8.6

Ratios (%)

Revenue/IC (x) 1.5 1.4 1.3 1.3

ROIC 35.1 29.3 29.6 30.0

ROE 17.3 15.8 16.9 18.0

ROA 10.7 10.0 11.6 12.3

EBITDA margin 38.1 36.5 37.5 37.7


EBITDA/net interest (x) 429.8 318.1

Net debt/equity -32.5 -25.9 -25.8 -25.8

Net debt/EBITDA (x) -1.0 -0.9 -0.9 -0.8

CF from operations/net debt


EPS Rep (diluted) 4.63 4.51 5.14 5.58

HSBC EPS (diluted) 5.23 4.75 5.14 5.58

DPS 4.00 4.25 4.50 4.75

Book value 30.27 30.03 30.67 31.50

Valuation data

Year to 12/2015a 12/2016e 12/2017e 12/2018e

EV/sales 2.0 2.1 2.1 2.0

EV/EBITDA 5.2 5.8 5.5 5.2

EV/IC 3.0 2.8 2.7 2.6

PE* 12.3 13.5 12.5 11.5

PB 2.1 2.1 2.1 2.0

FCF yield (%) 9.8 5.2 7.8 8.1

Dividend yield (%) 6.2 6.6 7.0 7.4


Issuer information


Target price (SAR) 82.00 Sector Diversified Telecoms


Bloomberg (Equity) STC AB Analyst Eric Chang


Price relative


50.00

60.00

70.00

80.00

90.00

100.00

110.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

2014 2015 2016 2017

Saudi Telecom Company Rel to TADAWUL ALL SHARE INDEX

Financials & valuation: Saudi Telecom Company Buy

31

EQUITIES TELECOM

25 July 2016

Competition

We believe the Kuwaiti market offers limited scope for subscriber growth based on two

observations. Firstly, mobile penetration is approaching 190%. Secondly, population growth is

not expected to accelerate. As such, operators will only be able achieve revenue growth by

increasing subscribers (which itself would be a zero-sum game), usage and tariffs.

During 2013, Viva overtook Ooredoo as the number two player in terms of subscribers and

revenues. It did so by applying the textbook use of pricing and handset subsidies to gain market

share at the expense of Zain Group and Ooredoo.

Chances of an improved tender offer and a maiden dividend are remote

Last year, STC launched a tender offer at KWD1/share to acquire the remaining 74% of Viva

Kuwait it did not own. Although it did not manage to take it private, the Saudi incumbent

acquired an additional 25.8% stake and increased its ownership to 51.8%. We note that the

Kuwait Investment Authority did not tender its stake and remains a strategic shareholder (6%

stake) while the Public Institution for Social Security has increased its stake from 6% to 9.8%.

We think it is unlikely (but would not rule it out completely) that STC launches another bid this

year and we do not see any incentive for the parent to improve on its previous offer, nor to

effect a maiden dividend payment. In addition to its ownership stake, we highlight that STC

controls four of the seven board seats and Viva’s CEO and CFO are former STC employees.

Business model is not optimal for cash generation. Maintain Reduce, cut TP to KWD0.77

(from KWD0.81)

We believe Viva’s pricing strategy and heavy handset subsidies may stem subscriber churn as

well as attract new customers. However, the strategy does not optimise cash generation

potential. We think generous voice and data allowances encourage usage and may lead to

network congestion. To remedy this, we think Viva would have to invest in spectrum and/or

network capacity, thus perpetuating a negative cycle.

Viva’s profits are flattered by its accounting treatment of subscriber acquisition costs (which are

capitalised instead of expensed), and trades on 3.8x 2017e EV/EBITDA. If these costs were

expensed instead, the stock would trade at 6.7x 2017e EBITDA against an EEMEA average of

4.4x. We lower our target price to KWD 0.77 (from KWD 0.81) on the back of a lower terminal

value. Our new target price implies 18.1% downside and we rate the stock Reduce as cash

generation is not sufficient for us to envisage a meaningful dividend. We do not see any

Viva Kuwait (VIVA KK)

STC, the parent company, has no incentive to launch a new tender

offer nor to push Viva to a dividend policy

Business model of handset subsidies is not optimal for cash

generation

Maintain Reduce, cut TP to KWD0.77 (from KWD0.81)

EQUITIES TELECOM

25 July 2016

32

incentive for STC to implement a divided policy for its Kuwaiti subsidiary given its majority

control.

Estimates changes

We cut our revenue and EBITDA estimates by c7% due to increasingly generous voice and

data allowances. This impacts net profit by 21% in 2016e and c.7% in 2017-18e.

Viva capitalises subscriber acquisition costs instead of expensing them, which flatters reported

profit. If we adjust the P&L for subscriber acquisition costs, EBITDA margins would be in the

region of 26% instead of 47%, on our calculations.

Viva Kuwait: Change in estimates

__________ New __________ _________ Previous __________ _________ Difference __________ (KWDm) 2016e 2017e 2018e 2016e 2017e 2018e 2016e 2017e 2018e

Revenues 263.2 264.9 272.8 288.2 285.5 292.5 -8.7% -7.2% -6.7% EBITDA 125.4 127.0 131.5 135.6 136.0 140.7 -7.5% -6.6% -6.6% EBITDA margin 47.6% 47.9% 48.2% 47.0% 47.6% 48.1% 0.6% 0.3% 0.1% Net profit 29.7 43.4 36.7 37.6 48.5 39.0 -21.0% -10.5% -6.0% CapEx -104.6 -106.1 -109.5 -116.0 -114.4 -117.4 -9.8% -7.2% -6.7% % of revenues 39.7% 40.1% 40.1% 40.2% 40.1% 40.1% -0.5% 0.0% 0.0%


Valuation and risks

We value the company on a DCF valuation based on an unchanged WACC of 7.0%,

incorporating a risk-free rate of 3.0% and an equity risk premium of 4.5%. Given its short trading

history (listing in December 2014), we use a beta of 1. We continue to use a 2.5% terminal

growth rate and a long-term EBITDA margin of 50%. The reduction in our target price to

KWD0.77 (from KWD 0.81) is a result of a lower terminal value KWD639m (vs KWD689m) as

we lowered the terminal EBITDA margin from 49.9% to 49.6%. Our new TP implies 18.1%

downside and we rate the stock Reduce.


______________________________________ WACC ______________________________________ 6.00% 6.25% 6.50% 6.75% 6.98% 7.25% 7.50% 7.75% 8.00%

1.0% 0.799 0.754 0.713 0.675 0.644 0.609 0.580 0.553 0.528 Long 1.5% 0.856 0.803 0.756 0.713 0.678 0.639 0.607 0.577 0.550 Term 2.0% 0.927 0.864 0.809 0.760 0.719 0.675 0.639 0.605 0.575 Growth 2.5% 1.018 0.942 0.876 0.817 0.770 0.719 0.677 0.639 0.605 Rate 3.0% 1.139 1.043 0.961 0.890 0.833 0.773 0.724 0.680 0.641 3.5% 1.309 1.181 1.075 0.985 0.914 0.841 0.782 0.731 0.685 4.0% 1.564 1.381 1.234 1.114 1.023 0.930 0.858 0.795 0.740


As a cross-reference, we detail below the valuation multiples implied at our target price.

Viva Kuwait: implied valuation at our KWD0.77 target price

2016e 2017e 2018e

Viva Kuwait EV/EBITDA adj. 6.2x 5.7x 5.5x EV/EBITDA (reported) 3.3x 3.3x 3.2x P/E 13.1x 8.9x 10.5x EEMEA average EV/EBITDA 4.6x 4.4x 4.0x P/E 12.1x 10.3x 10.2x


33

EQUITIES TELECOM

25 July 2016

On adjusted 2017e EV/EBITDA, the stock currently trades at 6.7x, compared with the EEMEA

average of 4.4x. The difference between the adjusted and reported multiple (of 3.8x) is due to

Viva’s accounting treatment of subscriber acquisition costs. The company capitalises the cost

and then amortises it over the subscriber’s contract duration.

Valuation

(period-ending) 2016e 2017e 2018e

EV/EBITDA (reported) 4.0x 3.8x 3.5x EV/EBITDA adj. 7.5x 6.7x 6.2x P/E 16.0 10.8x 12.8x

Based on current price as of 21 July 2016 Source: HSBC estimates

Viva Kuwait: EV/EBITDA Viva Kuwait: P/E


Risks


Further market share gains particularly on the lucrative post-paid segment;

ARPU improvement could yield better-than-expected margin increase;

STC launching another voluntary tender offer at a premium to its previous offer.

2

3

4

5

6

Jan-15 May-15 Sep-15 Jan-16 May-16


5

7

9

11

13

15

17

Jan-15 May-15 Sep-15 Jan-16 May-16

P/E +1Y avg -5Y

EQUITIES TELECOM

25 July 2016

34

Viva Kuwait in charts

Growth is normalising Strategy remains capex intensive (capex as a % of revenue)

Source: Company data. HSBC estimates Source: Company data. HSBC estimates

We expect cash generation from 2017e… (KWDm)

… but contrary to consensus we do not expect Viva to pay dividends

Source: Company data. HSBC estimates Source: Bloomberg

-50%

0%

50%

100%

150%

200%

2013 2014 2015 2016e 2017e 2018e

Revenue EBITDA

20%

30%

40%

50%

60%

70%

2013 2014 2015 2016e 2017e 2018e

-40

-30

-20

-10

0

10

20

30

2013 2014 2015 2016e 2017e 2018e

FCF

2

3

4

5

6

Dec-14 Apr-15 Aug-15 Dec-15 Apr-16

DIV YLD +1Y avg -5Y

35

EQUITIES TELECOM

25 July 2016


Year to 12/2015a 12/2016e 12/2017e 12/2018e

Profit & loss summary (KWDm)

Revenue 277 263 265 273

EBITDA 131 125 127 132

Depreciation & amortisation -82 -93 -81 -93

Operating profit/EBIT 49 33 46 39

Net interest -3 -2 0 0

PBT 45 31 45 38

HSBC PBT 46 31 45 38

Taxation -2 -1 -2 -2

Net profit 43 30 43 37

HSBC net profit 44 29 43 37

Cash flow summary (KWDm)

Cash flow from operations 147 99 125 130

Capex -148 -105 -106 -109

Cash flow from investment -148 -105 -106 -109

Dividends 0 0 0 0

Change in net debt -33 9 -16 -19

FCF equity -6 -9 16 19

Balance sheet summary (KWDm)

Intangible fixed assets 51 48 55 56

Tangible fixed assets 125 140 158 173

Current assets 87 67 88 88

Cash & others 52 21 40 37

Total assets 263 255 302 318

Operating liabilities 98 82 82 83

Gross debt 72 51 54 32

Net debt 21 30 14 -5

Shareholders' funds 93 123 166 203

Invested capital 113 152 179 197


Year to 12/2015a 12/2016e 12/2017e 12/2018e

Y-o-y % change

Revenue 15.9 -4.9 0.6 3.0

EBITDA 16.3 -4.2 1.3 3.6

Operating profit 8.4 -32.7 39.9 -15.3

PBT 10.2 -30.9 46.0 -15.4

HSBC EPS 4.3 -33.4 48.0 -15.5

Ratios (%)

Revenue/IC (x) 2.6 2.0 1.6 1.5

ROIC 30.5 25.8 22.3 19.1

ROE 61.6 27.2 30.1 19.9

ROA 19.1 12.2 15.7 12.0

EBITDA margin 47.3 47.6 47.9 48.2



Net debt/equity 22.1 24.1 8.1 -2.6


CF from operations/net debt 714.5 334.5 922.2

Per share data (KWD)

EPS Rep (diluted) 0.09 0.06 0.09 0.07

HSBC EPS (diluted) 0.09 0.06 0.09 0.07

DPS 0.00 0.00 0.00 0.00

Book value 0.19 0.25 0.33 0.41

Valuation data

Year to 12/2015a 12/2016e 12/2017e 12/2018e

EV/sales 1.8 1.9 1.8 1.7

EV/EBITDA 3.7 4.0 3.8 3.5

EV/IC 4.3 3.3 2.7 2.4

PE* 10.7 16.0 10.8 12.8

PB 5.1 3.8 2.8 2.3

FCF yield (%) -1.3 -2.0 3.4 4.0

Dividend yield (%) 0.0 0.0 0.0 0.0


Issuer information

Share price (KWD) 0.94 Free float 50%

Target price (KWD) 0.77 Sector Diversified Telecoms

Reuters (Equity) VIVA.KW Country Kuwait

Bloomberg (Equity) VIVA KK Analyst Eric Chang


Price relative


0.39

0.59

0.79

0.99

1.19

1.39

0.39

0.59

0.79

0.99

1.19

1.39

2014 2015 2016 2017

VIVA KUWAIT Rel to KUWAIT SE PRICE INDEX

Financials & valuation: VIVA KUWAIT Reduce

EQUITIES TELECOM

25 July 2016

36

Competition will remain elevated…

Since Q3 2014, both Vodafone Qatar and Ooredoo have seen steady declines in ARPU as

competition takes its toll. Earlier this year, we had seen signs of moderating competitive

intensity, but we now expect competitive pressures to remain. Ooredoo has not experienced y-

o-y ARPU growth since Q4 2012 and Vodafone Qatar has had six consecutive quarters of y-o-y

ARPU decline.

Any increase in market share will be achieved through further ARPU erosion…

Of greater concern is that Vodafone Qatar’s ARPU discount to Ooredoo’s has widened.

Vodafone Qatar, the smaller operator, has had four consecutive quarters of y-o-y revenue

decline and has seen its EBITDA margin contract. Given Vodafone Qatar has c. 30% subscriber

and revenue share, we believe any increase in market share can only be achieved through

further ARPU dilution, which would hamper profitability.

…thus straining profitability and cash generation

Vodafone Qatar has managed to generate free cash flow in two of its eight years of operations,

for an aggregate amount of QAR273m. We forecast cash generation remains subdued as we

model a modest recovery in EBITDA margins as well as an increase in capex and capex

intensity.

We believe Vodafone Qatar will need to ramp up network spend to meet increased usage and

any perceived weakness (relative to Ooredoo) in network coverage.

Maintain Reduce, cut TP to QAR8 from QAR9.5

Vodafone Qatar has yet to reach profitability, eight years after commercial launch, which

highlights the challenge of operating in a small market. The stock looks expensive in our view,

trading at 21.8x FY2017e EV/EBITDA versus the EEMEA sector average of 4.4x. We do not

think Vodafone’s low ROIC (below WACC) justifies such a premium.

We cut our DCF-derived TP to QAR8.0, from QAR9.5 as a result of lower estimates flowing

through the DCF model. Our new TP implies 28.9% downside and we rate the stock Reduce.

Vodafone Qatar (VFQS QD)

We think intense competition will prevent VFQS from pushing

through significant ARPU increases

Margins recovery and cash generation should remain subdued

Maintain Reduce, cut TP to QAR8 (from QAR9.25)

37

EQUITIES TELECOM

25 July 2016

Estimates changes

ARPU has been trending downwards in the past quarters, which leads us to cut our ARPU

assumptions. We lower our revenue and EBITDA estimates by c4% in FY2017 and 2018. The

company withdrew dividend payment in FY2016. We discount a resumption of the dividend

payment in FY2017e and expect the telecom company to conserve cash. In this report, we

introduce our estimates for FY2019, where we still do not expect to see a maiden profit.

Change in estimates

___________ New ____________ _______ Previous _______ ______ Difference _______ QARm, 31-mar year-end 2017e 2018e 2019e 2017e 2018e 2017e 2018e

Revenue 2,235 2,379 2,514 2,328 2,472 -4.0% -3.8% EBITDA 481 587 691 626 761 -23.2% -23.0% % margin 21.5% 24.7% 27.5% 26.9% 30.8% -5.4ppt -6.1ppt Net profit -316 -225 -138 -197 -68 nm nm DPS, QAR 0.00 0.21 0.21 0.21 0.21 -100.0% 0.0% Capex -419 -391 -402 -390 -379 7.5% 3.0%


Valuation and Risks

Our new TP of QAR8.00, cut from QAR9.5 due to lower estimates, is derived from a DCF

valuation, using the same assumptions as previously: an 8.7% WACC based on our EM equity

strategy team’s cost of equity assumptions of a risk-free rate of 3%, equity risk premium of

6.5%. We use a beta of 1.46 as calculated by FactSet.


___________________________________ WACC ____________________________________ 7.5% 8.0% 8.5% 8.7% 9.0% 9.5% 10.0%

Long 1.0% 8.80 7.90 7.10 6.80 6.40 5.70 5.20 Term 2.0% 10.00 8.80 7.80 7.50 7.00 6.30 5.60 Growth 2.5% 10.80 9.40 8.30 8.00 7.40 6.60 5.90 Rate 3.0% 11.70 10.20 8.90 8.50 7.80 7.00 6.20 3.5% 12.90 11.10 9.60 9.20 8.40 7.40 6.60


As a cross-reference we detail below the valuation multiples implied at our target price.

Vodafone Qatar: implied EV/EBITDA multiple at our QAR8.0 target price

2017e 2018e 2019e

Vodafone Qatar 15.8x 13.0x 11.0x EEMEA average 4.6x 4.4x 4.0x


Eight years after commercial launch, Vodafone Qatar has yet to post a net profit, highlighting

the challenge of operating in a small market. Yet the market rates the company highly, and we

think it looks expensive, trading at 21.8x FY2017e EBITDA versus the EEMEA sector average

of 4.4x. In our view, EBITDA would have to more than quadruple to justify that multiple – no

small feat considering that population growth in Qatar is unlikely to deliver that many additional

subscribers. In our view, quadrupling ARPU would also pose a challenge. We do not think

Vodafone’s ROIC or dividend yield justify such premium. As Vodafone Qatar’s earnings have

EQUITIES TELECOM

25 July 2016

38

been negative since launch, a PE multiple chart is not appropriate and so we show EV/EBITDA

only below.

Vodafone Qatar: EV/EBITDA

Source: Bloomberg

Risks


A resilient Qatar economy driving telecom spend;

Increased market share in mobile (particularly in the post-paid segment) and fixed services;

Better-than-expected ARPU improvement would be a fillip to revenue.

10

15

20

25

30

35



39

EQUITIES TELECOM

25 July 2016

Vodafone Qatar in charts

Vodafone’s EBITDA margin is sub-par… … due to aggressive pricing (ARPU in QAR)

Source: Company data, HSBC estimates Source: Company data, HSBC calculations

We do not expect it to earn its cost of capital over the short term


15%

20%

25%

30%

35%

40%

45%

50%

55%

2013 2014 2015 2016 2017e 2018e 2019e

ORDS VFQS

90

110

130

150

170


ORDS VFQS

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2013 2014 2015 2016 2017e 2018e 2019e

ROIC

EQUITIES TELECOM

25 July 2016

40


Year to 03/2016a 03/2017e 03/2018e 03/2019e

Profit & loss summary (QARm)

Revenue 2,119 2,235 2,379 2,514

EBITDA 401 481 587 691


Operating profit/EBIT -415 -294 -203 -117

Net interest -19 -22 -22 -21

PBT -466 -316 -225 -138

HSBC PBT -466 -316 -225 -138

Taxation 0 0 0 0

Net profit -466 -316 -225 -138

HSBC net profit -466 -316 -225 -138

Cash flow summary (QARm)


Capex -396 -494 -471 -482


Dividends -171 0 -178 -178

Change in net debt 134 86 -107 3

FCF equity -70 -87 106 174

Balance sheet summary (QARm)



Current assets 508 421 524 543

Cash & others 130 44 150 147

Total assets 6,992 6,624 6,409 6,101


Gross debt 1,023 1,023 1,023 1,023

Net debt 892 979 872 875




Year to 03/2016a 03/2017e 03/2018e 03/2019e

Y-o-y % change

Revenue -8.1 5.5 6.5 5.6

EBITDA -29.2 19.9 22.0 17.8

Operating profit

PBT

HSBC EPS

Ratios (%)

Revenue/IC (x) 0.3 0.4 0.4 0.5

ROIC 1.7 3.3 5.2 7.1

ROE -8.9 -6.6 -5.0 -3.3

ROA -6.2 -4.3 -3.1 -1.9

EBITDA margin 18.9 21.5 24.7 27.5

Operating profit margin -19.6 -13.2 -8.5 -4.7


Net debt/equity 18.1 21.2 19.9 21.5



Per share data (QAR)

EPS Rep (diluted) -0.55 -0.37 -0.27 -0.16

HSBC EPS (diluted) -0.55 -0.37 -0.27 -0.16

DPS 0.00 0.00 0.21 0.21

Book value 5.82 5.45 5.18 4.81

Valuation data

Year to 03/2016a 03/2017e 03/2018e 03/2019e

EV/sales 4.9 4.7 4.4 4.1

EV/EBITDA 26.0 21.8 17.7 15.0

EV/IC 1.8 1.9 2.0 2.1

PE*

PB 1.9 2.1 2.2 2.3

FCF yield (%) -0.7 -0.9 1.1 1.8

Dividend yield (%) 0.0 0.0 1.9 1.9


Issuer information

Share price (QAR) 11.25 Free float 100%

Target price (QAR) 8.00 Sector Wireless Telecoms

Reuters (Equity) VFQS.QA Country Qatar

Bloomberg (Equity) VFQS QD Analyst Eric Chang


Price relative


8.60

10.60

12.60

14.60

16.60

18.60

20.60

22.60

8.60

10.60

12.60

14.60

16.60

18.60

20.60

22.60

2014 2015 2016 2017

Vodafone Qatar Rel to DSM 20 INDEX

Financials & valuation: Vodafone Qatar Reduce

41

EQUITIES TELECOM

25 July 2016

No respite from competition

We think competition will remain elevated in Kuwait (which contributed 28% of 2015 revenues

and 32% of EBITDA at Zain Group). We are concerned by the increasingly generous data

allowances on postpaid and prepaid tariffs and we expect a close fight for second position

(between Ooredoo and Viva). We expect Zain Group and Ooredoo’s ARPUs to decline but see

low single-digit growth for Viva. We do not expect competitive intensity to improve in the Iraq

market (32% of Zain Group’s 2015 revenues, 29% of EBITDA), as operators cope with the

impact of 20% VAT and political instability.

But Zain Group is cash-generative and should remain so

Despite competition and geo-political risks, Zain Group has remained cash-generative in all its

major markets. We forecast free cash flow increasing 9.5% CAGR 2015-18e

Tower sale would be a trigger for a special dividend

In 2010, Zain Group sold its African assets to Bharti for USD9bn and used the proceeds for

deleveraging as well as increased dividends. In light of its low levels of gearing, we think the

expected disposal of its Kuwaiti tower assets may also lead to a higher dividend. Management

expects the transaction to close in H2 2016. On our estimates, the transaction could generate

proceeds of KWD90m (based on 1,988 sites valued at USD150k). Assuming these proceeds

are entirely paid out as dividends, shareholders could be entitled to a special dividend of KWD

0.023 (a yield of 6.8% on the current share price).

Our Buy case remains a valuation call; maintain KWD0.45 TP

The current share price effectively ascribes nil value to Iraq and Sudan. We think this is

unjustified because both operations remain cash generative, despite the geo-political risks. Zain

Group’s dividend yield (c12% in 2017e) and free cash flow yield (c26%) should provide support.

We also note the stock trades significantly below the EEMEA sector averages, at 2.9x 2017e

EV/EBITDA versus the EEMEA sector average of 4.4x. On 2017e PE, Zain Group trades at 6.1x

versus an EEMEA average of 10.3x.

We maintain our Buy rating and KWD0.45 target price, which implies 36.4% upside. Our

estimates remain unchanged.

Zain Group (ZAIN KK)

We do not see any respite from competition

Zain Group is trading at distressed levels. Completion of tower sale

in Kuwait would be a short-term catalyst

Maintain Buy and TP of KWD0.45

EQUITIES TELECOM

25 July 2016

42

Valuation and Risks

The current price implies nil value to the Iraq and Sudan operations. We acknowledge the geo-

political risks in both markets but highlight these remain cash generative. We continue to use a

multiples-based SOTP to value Zain Group. We have not changed any of the target multiples

but roll over our valuation to 2017 estimates. We value: Kuwait on 5x 2017e EBITDA; Jordan

and Bahrain on 4x; Iraq and Sudan on 3x 2017e EBITDA. We continue to value South Sudan at

nil value. We incorporate the 37% Zain KSA stake at our TP of SAR6.35 (we have initiated on

the stock today, please see Recapitalisation and dilution seem unavoidable; also the company

section below). We rate the stock Buy, with our target price of KWD0.45 implying 36.4% upside.

Sum-of-the-parts

EBITDA EV % EV % EV Method (KWDm) 2017e /EBITDA stake of EV (previous)

Kuwait 160 5.0x 100.0% 802 35.4% 782 Multiple Iraq 137 3.0x 76.0% 312 13.8% 289 Multiple Sudan 101 3.0x 100.0% 304 13.4% 277 Multiple South Sudan 0 0.0x 100.0% 0 0.0% 0 Multiple Jordan 66 4.0x 96.5% 254 11.2% 237 Multiple Bahrain 23 4.0x 54.8% 51 2.3% 51 Multiple Lebanon 10 1.0x 100.0% 10 0.5% 10 Multiple Subsidiaries 1,732 1,646 Zain KSA 183 37.0% 110 4.9% 193 HSBC TP SAR6.35 Associates 110 193 Other assets 424 18.7% 411 EV 2,267 2,251 Net debt -523 -505 Equity value 1,744 1,746 Issued shares (m) 3,901.3 FV 0.45 Share price 0.33 Upside / (downside) 36.4%

Current price is as of 21 July 2016 Source: HSBC estimates

As a cross-reference, we detail below the valuation multiples implied at the target price.

Zain Group: implied valuation at our KWD0.45 target price

2016e 2017e 2018e

Zain Group P/E 10.6x 8.3x 7.0x EV/EBITDA 4.8x 4.6x 4.3x Dividend yield 6.7% 8.9% 11.2% EEMEA average P/E 12.1x 10.3x 10.2x EV/EBITDA 4.6x 4.4x 4.0x Dividend yield 4.8% 5.4% 5.7%


43

EQUITIES TELECOM

25 July 2016

Zain Group has consistently de-rated over the past three years and we think the markets are

penalising it for the geo-political risks Iraq and Sudan. We acknowledge these concerns but

note both operations remain cash generative despite the geo-political risks.

Zain Group EV/EBITDA Zain Group P/E


Risks

Key downside risks include:

Geopolitical instability in Iraq and to some extent Sudan and South Sudan;

Negative FX movements in some of its markets impacting the group’s financial

performance;

Press reports about the company’s interest in a mobile license in Egypt, if confirmed, could

compromise the balance sheet and the company’s ability to maintain dividends.

4

5

6

7

8



6

7

8

9

10

11

12

13


P/E +1Y avg -5Y

EQUITIES TELECOM

25 July 2016

44

Zain Group in charts

Competition and geopolitical risks impact profitability (KWDm)

Zain Group should be able to maintain capital discipline

Source: Company data, HSBC estimates Source: Company data, HSBC estimates

Thus ensuring leverage… (KWDm) … and free cash flow and dividends

Source: Company data, HSBC estimates Source: Company data, HSBC estimates

… remain sustainable (%)

Source: Bloomberg

40%

41%

42%

43%

44%

45%

400

425

450

475

500

525

550

2013 2014 2015 2016 2017e 2018e

EBITDA margin

0%

10%

20%

30%

40%

2013 2014 2015 2016 2017e 2018e

ROIC CapEx / Revenues

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0

100

200

300

400

500

600

2013 2014 2015 2016 2017e 2018e

Net debt (cash) Net debt/EBITDA

0%

5%

10%

15%

20%

25%

2013 2014 2015 2016 2017e 2018e

FCF Dividend

5

6

7

8

9

10

11

12

13


DIV YLD +1Y avg -5Y

45

EQUITIES TELECOM

25 July 2016


Year to 12/2015a 12/2016e 12/2017e 12/2018e

Profit & loss summary (KWDm)

Revenue 1,138 1,126 1,189 1,257

EBITDA 504 470 498 528


Operating profit/EBIT 291 258 287 318

Net interest -21 -18 -13 -7

PBT 202 208 265 309

HSBC PBT 236 218 265 309

Taxation -36 -31 -35 -39

Net profit 154 165 211 249

HSBC net profit 190 173 211 249

Cash flow summary (KWDm)


Capex -217 -167 -176 -185


Dividends -156 -118 -117 -156

Change in net debt 160 -82 -156 -140

FCF equity 230 254 274 296

Balance sheet summary (KWDm)


Tangible fixed assets 902 866 821 796

Current assets 795 901 1,069 1,220

Cash & others 360 472 628 768

Total assets 3,495 3,528 3,642 3,766


Gross debt 965 995 995 995

Net debt 605 523 367 227




Year to 12/2015a 12/2016e 12/2017e 12/2018e

Y-o-y % change

Revenue -6.2 -1.0 5.6 5.7

EBITDA -2.6 -6.8 6.0 6.1

Operating profit -15.8 -11.4 11.2 10.8

PBT -17.6 3.2 27.0 16.9

HSBC EPS -17.8 -8.8 22.2 17.7

Ratios (%)

Revenue/IC (x) 0.7 0.7 0.8 0.8

ROIC 14.0 13.0 15.8 18.4

ROE 12.0 11.5 14.2 16.2

ROA 5.6 5.8 7.2 8.0

EBITDA margin 44.3 41.7 41.9 42.0



Net debt/equity 35.0 31.6 21.3 12.6



Per share data (KWD)

EPS Rep (diluted) 0.04 0.04 0.05 0.06

HSBC EPS (diluted) 0.05 0.04 0.05 0.06

DPS 0.03 0.03 0.04 0.05

Book value 0.40 0.37 0.39 0.40

Valuation data

Year to 12/2015a 12/2016e 12/2017e 12/2018e

EV/sales 1.4 1.4 1.2 1.0

EV/EBITDA 3.2 3.3 2.9 2.5

EV/IC 0.9 1.0 0.9 0.9

PE* 6.8 7.4 6.1 5.2

PB 0.8 0.9 0.9 0.8

FCF yield (%) 23.0 24.7 26.0 27.5

Dividend yield (%) 9.1 9.1 12.1 15.2


Issuer information

Share price (KWD) 0.33 Free float 50%

Target price (KWD) 0.45 Sector Wireless Telecoms

Reuters (Equity) ZAIN.KW Country Kuwait

Bloomberg (Equity) ZAIN KK Analyst Eric Chang


Price relative


0.27

0.37

0.47

0.57

0.67

0.27

0.37

0.47

0.57

0.67

2014 2015 2016 2017

Zain Group Rel to KUWAIT SE PRICE INDEX

Financials & valuation: Zain Group Buy

EQUITIES TELECOM

25 July 2016

46

Competition needs to become rational

Zain KSA needs to improve profitability and repair its balance sheet, and a price war at this

juncture with Mobily would not be helpful. The past year has seen a significant shift in the

mobile landscape. Mobily, once a formidable player, has seen its market share fall from 38% to

27% since its accounting scandal while Zain KSA increased its share by 5ppt to 23% over the

same period, albeit these have been achieved through aggressive pricing.

Cash generation is insufficient to deleverage to a sustainable level

Cash generation remains low because Zain KSA has been competing on price to gain market

share and spending disproportionately on sales & marketing. Zain KSA’s growth has been

stunted by the cost of its telecoms license (SAR22.9bn / USD6.1bn) and a debt-heavy capital

structure. In hindsight, the price was exorbitant given that market penetration was already in

excess of 100%. Net interest expenses represent half of EBITDA and have been in large part

responsible for the delay in reaching net profitability.

We think the debt load is unsustainable. Benchmark rates have increased significantly in the

past year and will impact Zain KSA’s funding costs at refinancing. We note the SAR2.25bn bank

facility was refinanced in early June with a two-year maturity extension. The extent of funding

increase (if any) should be apparent in the Q3 2016 financials.

Tower disposal is not the solution. Recapitalisation and dilution seem unavoidable

Zain KSA is looking to sell its towers and expects the disposal to conclude in H2 2016. During

the Q4 2015 earnings call, management stated the company had over 5,000 towers. Assuming

a valuation of around USD150k-200k per tower, Zain KSA’s assets could raise SAR4.2-5.6bn.

However, although proceeds could retire 20-30% of current net debt, leverage would remain

elevated.

Over our 2016-18 forecast period, we estimate Zain KSA generates cumulative free cash flow of

SAR975m. As such, we think another recapitalisation – through a rights issue or debt swap – is

highly likely, which in either case, would dilute minority shareholdings by nearly half.

We rate Zain KSA Reduce with a SAR 6.35 target price

In our report Recapitalisation and dilution seem unavoidable, also published today, we initiate

on Zain KSA with a Reduce rating and SAR6.35 DCF-derived target price, which implies 20.9%

downside.

Zain KSA (ZAINKSA AB)

Management has made great strides in turning the company around

but cash generation remains sub optimal

A tower disposal is not the solution for deleveraging

We rate the stock Reduce with a SAR6.35 target price as dilution

seems unavoidable

47

EQUITIES TELECOM

25 July 2016

On the cusp of a turnaround…

In the past three years, the current management team has improved Zain KSA’ performance.

Market share has increased from 15% in Q4 2013 to 23% in Q1 2016. Profitability improved

significantly as EBITDA margin rose from 13.5% in Q4 2013 to 25.2% in Q1 2016. Management

has also expanded retail channels and increased network coverage.

In parallel, the company is benefiting from a favourable regulatory framework. In the past year,

the CITC (the telecoms regulator) has cut mobile termination rates (MTR) by 60%. In April 2015,

the regulator introduced the first reduction in six years by cutting MTR by 40% to SAR 0.15/mn,.

In Q2 this year, MTR was cut by another third, to SAR0.10/mn. These cuts bring Saudi MTR in

line with emerging market averages.

Latest MTR cuts in Saudi Arabia brings it line with international levels (in SAR/mn)

Source: Company data, HSBC calculations

Following these cuts, Zain KSA adjusted its tariffs for pre-paid calls accordingly, to increase

competitiveness and make it easier to attract subscribers.

0%

5%

10%

15%

20%

25%

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

2008 2009 2010 2011 2012 2013 2014 2015 2016

KSA EE GCC Market share (RHS)

EQUITIES TELECOM

25 July 2016

48

Zain KSA’s prepaid voice mobile tariffs are competitive (SAR/mn)

Source: Company

…but cash generation is insufficient…

Cash generation remains low because the operator has been competing on price to gain market

share. Zain KSA’s ARPU has been steadily declining since Q4 2012 and has allowed it to

increase its subscriber base, but the impact on revenues has been subdued.

Revenue growth lower than subscriber growth due to ARPU erosion

Zain KSA’s ARPU trails the competition and is trending downwards (SAR)


0.00

0.10

0.20

0.30

0.40

0.50

0.60

ZAINKSA EEC STC

On-net Off-net

MTR

0

10

20

30

40

50

60

70

80

-20%

-10%

0%

10%

20%

30%

40%

Q1'13 Q3'13 Q1'14 Q3'14 Q1'15 Q3'15 Q1'16

Revenue SubscriberARPU (SAR) RHS

40

50

60

70

80

90

100

110

120


STC EEC ZAINKSA

49

EQUITIES TELECOM

25 July 2016

We note Zain KSA has also been spending disproportionately on sales & marketing compared

with Mobily, the second operator.

Zain KSA has been spending aggressively on sales & marketing (SARm)


…to deleverage to a sustainable level

Zain KSA’s growth has been stunted by the cost of its telecoms license (SAR22.9bn /

USD6.1bn) and a debt-heavy capital structure. In hindsight, the price was exorbitant given that

market penetration was already in excess of 100%. Net interest expense is eroding EBITDA

and has been in large part responsible for the delay in reaching net profitability.

Debt load is delaying profitability

(SARm) 2008 2009 2010 2011 2012 2013 2014 2015

EBITDA -787 -1,073 -144 899 879 890 1,100 1,629 Net interest -174 -632 -1,195 -1,114 -818 -702 -736 -831 Net loss -1,813 -3,099 -2,833 -1,925 -1,749 -1,651 -1,270 -972 Net debt 12,592 14,054 15,472 16,279 12,547 13,363 13,771 13,983 Net debt/EBITDA -16.0x -13.1x -107.4x 18.1x 14.3x 15.0x 12.5x 8.6x Interest cover -4.5x -1.7x -0.1x 0.8x 1.1x 1.3x 1.5x 2.0x


0

500

1,000

1,500

2,000

2,500

2010 2011 2012 2013 2014 2015

ZAINKSA EEC

EQUITIES TELECOM

25 July 2016

50

We think the debt load is unsustainable. Benchmark rates have increased significantly in the

past year and will impact Zain KSA’s funding costs at refinancing. We note that the SAR2.25bn

bank facility was refinanced in early June with a two-year maturity extension. The extent of

funding increase (if any) should be apparent in the Q3 2016 financials.

Debt funding costs are set to increase Zain KSA’s debt is mainly SAIBOR-based (as at Q1 2016)

Source: ‘Thomson Reuters Datastream Source: Company data, HSBC calculations

Tower disposal is not the solution…

Zain KSA is looking to sell its towers and expects the disposal to conclude in H2 2016. As per

the Q4 2015 earnings call, management stated the company had over 5,000 towers. To gauge

potential proceeds, we have used HSBC’s Global TMT research team’s list of recent tower

transactions in emerging markets. The table points to a value of USD196k/tower.

Tower deals

Year Country Target Acquirer/JV Partner No of Towers EV/Tower

(USD 000')

2013 Brazil Telefonica Brasil N.A. 93 176 2013 Brazil Axtel American Tower 883 283 2013 Brazil Oi SBA Communications 2,113 162 2013 Brazil Oi BR Towers 2,113 119 2013 Brazil Oi Grupo TorreSur 2,113 139 2013 Brazil Nextel Brazil American Tower 2,790 148 2013 Mexico Nextel Brazil American Tower 1,666 239 2014 Nigeria Etisalat Nigeria IHS 2,136 187 2014 Nigeria Bharti Airtel ATC 4,800 219 2014 Brazil Oi SBA Towers 1,641 286 2014 Brazil TIM American Tower 6,481 185 2014 Brazil BR Towers American Tower 4,630 211 Average 196

Source: Company data, HSBC Global TMT research

0.0

0.5

1.0

1.5

2.0

2.5

Jan-

10

Jun-

10

Nov

-10

Apr

-11

Sep

-11

Feb

-12

Jul-1

2

Dec

-12

May

-13

Oct

-13

Mar

-14

Aug

-14

Jan-

15

Jun-

15

Nov

-15

Apr

-16

$ LIBOR 3M SAIBOR 3M

74%

22%

2%2%

Murabaha BankExport credit Notes payable

51

EQUITIES TELECOM

25 July 2016

Based on a valuation of around USD150k-200k per tower, Zain KSA’s towers could raise

SAR4.2-5.6bn, but although the proceeds could retire 20-30% of current net debt, leverage

would remain elevated.

Zain KSA tower valuation

Valuation per tower (USD’000) No sale 150 200 250 300

# towers 5,000 5,000 5,000 5,000 5,000 Proceeds (USDm) 0 750 1,000 1,250 1,500 Proceeds (SARm) at USD:SAR 3.75 0 2,813 3,750 4,688 5,625 % of net debt 21% 27% 34% 41% Pro-forma net debt (SARm) 13,697 10,884 9,947 9,009 8,072 Pro-forma Net debt/EBITDA 2017e 5.8x 4.6x 4.2x 3.8x 3.4x

Source: HSBC calculations

Recapitalisation and subsequent dilution seem unavoidable

The chart below highlights Zain KSA’s network under-investment relative to the number two

player, Mobily. In a context of increasing subscribers and greater data monetisation, Zain KSA

needs to ramp-up investments to avoid network congestion and retain customers, yet the debt

is a significant impediment to this.

Low capex in the context of growing data usage is not sustainable (SARm)


In 2012, Zain KSA sought to shore up the balance sheet through a rights issue, which raised

SAR3.5bn, and a debt equity swap, in which founding shareholders swapped SAR2.5bn of

shareholder loans advances for shares.

Over our 2016-18 forecast period, we estimate Zain KSA will generate cumulative free cash flow

of SAR 975m. As such, we think another a recapitalisation – through a rights issue or debt swap

– is highly likely, which in either case would result in minority shareholdings being diluted.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2010 2011 2012 2013 2014 2015

ZAINKSA EEC

EQUITIES TELECOM

25 July 2016

52

As at Q1 2016, the company had SAR4.1bn of shareholder loans, of which Zain Group is the

main creditor. We calculate the dilution effect based on various share price levels in the

following table, which highlights the elevated dilution risk.

Debt equity swap would be dilutive

Debt equity swap @ SAR 7.00

SAR 7.25

SAR 7.50

SAR 7.75

SAR 8.00

SAR 8.25

SAR 8.50

SAR 8.75

SAR 9.00

Shareholder loan 4,151 4,151 4,151 4,151 4,151 4,151 4,151 4,151 4,151 # shares issued (m) 593.07 572.62 553.53 535.67 518.93 503.21 488.41 474.45 461.27 Dilution 50.4% 49.5% 48.7% 47.9% 47.1% 46.3% 45.6% 44.8% 44.1% Net debt (pre-swap) 13,697 13,697 13,697 13,697 13,697 13,697 13,697 13,697 13,697 Net debt (pro-forma) 9,545 9,545 9,545 9,545 9,545 9,545 9,545 9,545 9,545 Net debt/EBITDA 2017e (pro-forma) 4.0x 4.0x 4.0x 4.0x 4.0x 4.0x 4.0x 4.0x 4.0x

Source: HSBC estimates and calculations

Company profile

Zain KSA is a mobile operator focused on Saudi Arabia. It was established in 2007 by Zain

Group (Buy, TP KWD0.45) which led the consortium that won the third mobile license. The

license cost SAR22.9bn (USD6.1bn) – nearly twice what Mobily paid.

Zain KSA was listed on the Saudi stock exchange in February 2008 (SAR14bn, USD3.7bn) and

started commercial operations in August that year. Zain Group remains the largest shareholder

with a 37% stake.

Shareholding structure

# shares (m) % ownership

Zain Group 216.21 37.04% Faden Trading & Contracting 34.85 5.97% Saudi Plastic 34.09 5.84% Free-float 298.58 51.15% 583.73 100.00%

Source: Bloomberg

The company has seen significant management changes, despite its short history. Hassan

Kabbani is the company’s fifth CEO, and Wissam Farhat is the third CFO.

Management Team

Title Joined

Hassan Kabbani CEO Q4 2013 Wissam Farhat CFO Q1 2013 Andrew White Chief Strategy Officer Q1 2013 Sultan Al Deghaither CTO 2009 Sherif Tahoun Chief Sales & Distribution Officer Abdulmajid Al Rashoudi Chief Customer Sales Officer Q1 2008 Sultan Al Shahrani Chief Human Resources Officer Q4 2015

Source: Company data

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Zain remains the smallest mobile operator in Saudi Arabia with a market share of 23% and

revenue share of 13%. At the end of 2015, the company’s 2G network covered 94%, 3G

network covered 88% and 4G network covered 82% of the population through approximately

7,000 sites.

Market share Revenue share


Financial estimates

We forecast revenue growth tapers off. We think subscriber growth should decelerate and

ARPU remain flat as Mobily gradually emerges from its turnaround phase.

Revenue model

(SAR m) 2014 2015 2016e 2017e 2018e

# subscribers (m) 9.00 11.90 13.42 13.78 14.15 change 6.4% 32.2% 12.8% 2.7% 2.7% Market share 17.0% 20.0% 24.0% 23.7% 23.4% ARPU (SAR)* 59.29 51.45 50.06 49.85 50.32 change -11.0% -13.2% -2.7% -0.4% 0.9% Revenues 6,244 6,741 7,596 8,137 8,435

Source: Company reports, HSBC estimates *HSBC calculation

As long as the balance sheet is not restructured, we forecast net losses throughout our forecast

period.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

STC EEC ZAIN MVNO

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

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-16

STC EEC ZAINKSA

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54

Zain KSA: Profit & loss

(SAR m) (Dec y/e) 2014 2015 2016e 2017e 2018e

Revenues 6,244 6,741 7,596 8,137 8,435 change -4.3% 8.0% 12.7% 7.1% 3.7% Cost of sales -3,021 -2,790 -2,935 -3,179 -3,315 Government fees 0.000 0.000 0.000 0.000 0.000 Gross profit 3,223 3,951 4,662 4,958 5,120 margin 51.6% 58.6% 61.4% 60.9% 60.7% Sales & marketing -2,031 -2,047 -2,380 -2,256 -2,176 G&A -91 -275 -292 -320 -335 EBITDA 1,100 1,629 1,990 2,382 2,610 margin 17.6% 24.2% 26.2% 29.3% 30.9% Depreciation -751 -1,114 -1,291 -1,219 -1,184 Amortisation -882 -656 -594 -591 -589 EBIT -534 -141 105 572 836 margin -8.5% -2.1% 1.4% 7.0% 9.9% Interest income 9 7 13 7 6 Interest expense -745 -838 -895 -936 -914 Net interest -736 -831 -881 -929 -909 Exceptional items 0 0 0 0 0 PBT (reported) -1,270 -972 -776 -357 -73 PBT (clean) -1,270 -972 -776 -357 -73 Zakat 0 0 0 0 0 Net profit (reported) -1,270 -972 -776 -357 -73 Net profit (clean) -1,270 -972 -776 -357 -73 # shares (m) 1,080.10 583.73 583.73 583.73 583.73 EPS (reported) -1.18 -1.67 -1.33 -0.61 -0.13 EPS (clean) -1.18 -1.67 -1.33 -0.61 -0.13 DPS 0.00 0.00 0.00 0.00 0.00


As mentioned in the previous section, we forecast an increase in capex, which will limit free-

cash flow generation.

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Zain KSA: Cash-flow statement

(SAR m) (Dec y/e) 2014 2015 2016e 2017e 2018e

EBITDA 1,100 1,629 1,990 2,382 2,610 Net interest -736 -831 -881 -929 -909 Tax 0 0 0 0 0 Change in EOSB 11 16 9 2 1 Change in WCR -106 670 884 245 138 Other 18 84 0 0 0 Operating cash-flow 287 1,568 2,001 1,700 1,840 Fixed assets -418 -1,238 -732 -1,084 -1,174 Intangible assets -101 -344 -483 -545 -571 CapEx -519 -1,582 -1,215 -1,629 -1,745 Investing cash-flow -519 -1,582 -1,215 -1,629 -1,745 Free cash-flow -232 -14 787 71 95 Equity issuance 0 0 0 0 0 Debt issuance -34 421 2,278 1,500 8,000 Debt repayment 992 -369 -3,396 -1,832 -8,210 Dividends 0 0 0 0 0 Financing cash-flow 1,950 -317 -1,118 -332 -210 Other item -1,901 702 0 0 0 Change in cash -201 286 -332 -261 -115


Zain KSA: Balance sheet

(SAR m) (Dec y/e) 2014 2015 2016e 2017e 2018e

PP&E 4,296 5,007 4,730 4,596 4,585 Intangible assets 17,469 16,813 16,595 16,549 16,530 Other fixed assets 212 132 118 118 118 Fixed assets 21,977 21,952 21,443 21,262 21,233 Inventories 63 104 84 92 97 Trade receivables 1,394 1,093 1,282 1,270 1,252 Prepaid expenses & other 1,340 1,521 1,470 1,396 1,322 Cash 1,092 1,378 1,056 794 679 Current assets 3,888 4,096 3,891 3,552 3,350 Total Assets 25,865 26,048 25,335 24,814 24,583 Share capital 10,801 5,837 5,837 5,837 5,837 Statutory reserves -67 -7 -21 -21 -21 Retained earnings -5,270 -1,278 -2,055 -2,412 -2,485 Equity 5,464 4,552 3,762 3,405 3,332 Murabaha 8,631 8,509 7,654 5,960 8,000 Commercial loans 2,250 2,250 2,250 3,750 1,500 Export credit 506 306 138 0 0 Shareholder loan 3,476 3,967 4,151 4,151 4,151 Notes payable 0 330 207 207 207 Debt 14,863 15,362 14,401 14,068 13,859 Trade payables 266 286 342 347 348 Accrued expenses 4,367 4,938 5,884 6,047 6,097 Deferred revenue 0 0 0 0 0 Due to related parties 789 838 850 850 850 EOSB 50 66 75 76 77 Derivative financial instruments

67 7 21 21 21

Other Liabilities 5,539 6,135 7,172 7,341 7,393 Total Equity & Liabilities 25,865 26,048 25,335 24,814 24,583 Net debt / (cash) 13,771 13,983 13,345 13,274 13,179


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56

Valuation and risks

We value Zain KSA using a DCF method. Our target price of SAR6.35 is based on a WACC of

10%. We have calculated the cost of capital using our GEM strategy team’s assumptions for

Saudi Arabia, with a risk-free rate of 3% and 7.5% equity risk premium. We use a 5-year beta of

1.48 and a long-term growth rate of 2%.

DCF sensitivity analysis, SAR

______________________________________ WACC ______________________________________ 9.0% 9.3% 9.5% 9.8% 10.0% 10.3% 10.5% 10.8% 11.0%

Long 1.0% 9.04 7.94 6.90 5.93 5.00 4.15 3.33 2.56 1.83 Term 1.5% 9.96 8.78 7.67 6.63 5.63 4.74 3.87 3.06 2.29 Growth 2.0% 11.02 9.73 8.54 7.42 6.35 5.39 4.47 3.61 2.79 Rate 2.5% 12.23 10.83 9.53 8.32 7.17 6.14 5.15 4.23 3.36 3.0% 13.65 12.10 10.67 9.35 8.10 6.98 5.92 4.93 4.00


57

EQ

UIT

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T

EL

EC

OM

25

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ly 2

016

Discounted cash-flow model

(SAR m) H2 2016e 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e TV

Revenues 3,995.5 8,137.0 8,435.2 8,816.3 9,258.8 9,702.5 10,116.6 10,531.3 10,956.5 11,394.7 11,846.7 12,312.3 12,791.6 13,284.9 13,792.4 change 3.7% 4.5% 5.0% 4.8% 4.3% 4.1% 4.0% 4.0% 4.0% 3.9% 3.9% 3.9% 3.8% EBITDA 1,070.1 2,381.9 2,609.7 2,838.4 3,068.6 3,284.8 3,479.1 3,664.1 3,845.0 4,024.6 4,204.4 4,385.3 4,568.3 4,754.0 4,943.0 margin 26.8% 29.3% 30.9% 32.2% 33.1% 33.9% 34.4% 34.8% 35.1% 35.3% 35.5% 35.6% 35.7% 35.8% 35.8% Deprec. & amort. -928.8 -1,810.3 -1,773.9 -1,770.4 -1,791.1 -1,830.0 -1,881.1 -1,939.2 -2,001.9 -2,068.1 -2,137.4 -2,209.4 -2,284.1 -2,361.4 -2,441.3 EBIT 141.3 571.6 835.8 1,068.0 1,277.5 1,454.7 1,598.0 1,724.9 1,843.2 1,956.5 2,067.0 2,175.9 2,284.2 2,392.6 2,501.8 Tax -3.5 -14.3 -20.9 -26.7 -31.9 -36.4 -39.9 -43.1 -46.1 -48.9 -51.7 -54.4 -57.1 -59.8 -62.5 Tax rate 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% NOPAT 137.8 557.3 814.9 1,041.3 1,245.5 1,418.4 1,558.0 1,681.8 1,797.1 1,907.6 2,015.3 2,121.5 2,227.1 2,332.8 2,439.2 change in WCR 334.2 245.5 138.2 161.9 182.8 180.7 167.2 168.4 174.3 181.5 188.9 196.2 203.3 210.3 217.3 CapEx -729.8 -1,629.2 -1,744.8 -1,862.2 -1,982.5 -2,096.2 -2,198.7 -2,297.9 -2,397.0 -2,497.3 -2,599.5 -2,703.8 -2,810.6 -2,920.1 -3,032.5 % revenues 18.3% 20.0% 20.7% 21.1% 21.4% 21.6% 21.7% 21.8% 21.9% 21.9% 21.9% 22.0% 22.0% 22.0% 22.0% FCF 671.0 983.9 982.2 1,111.4 1,236.9 1,332.9 1,407.7 1,491.4 1,576.3 1,660.0 1,742.2 1,823.3 1,903.8 1,984.3 2,065.3 26,315.6 Discount factor 96% 87% 79% 72% 65% 59% 54% 49% 45% 41% 37% 34% 30% 28% 25% 25% PV of FCF 987.9 857.1 777.8 800.1 809.3 792.7 761.1 733.0 704.1 674.0 643.1 611.8 580.6 550.1 520.4 6,631.4 EV 17,434.3 Net debt -13,696.8 Fair value 3,737.5 # of shares (m) 583.7 FV / share, SAR 6.35 Downside -20.9% Share price, SAR 8.03

Current price as of 21 July 2016 Source: HSBC estimates

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58

At our target price, Zain KSA would remain expensive relative to the EEMEA sector given its

lower profitability and severe dilution overhang.

Implied valuation at our SAR6.35 target price

2016e 2017e 2018e

EV/EBITDA 8.6x 7.1x 6.5x EEMEA average 4.6x 4.4x 4.0x


Zain KSA’s share price has de-rated over the past five years, but we think the market is still

overlooking the severe dilution from a debt swap or re-capitalisation.

We think the market is still overlooking the severe dilution overhang

Source: Bloomberg

Risks


Tower disposal: Zain KSA is looking to sell its towers and expects disposal to conclude in

H2 2016. On the Q4 2015 earnings call, management stated the company had over 5,000

towers. Based on cUSD150k-200k per tower, Zain KSA’s towers could raise SAR4.2-5.6bn,

but although proceeds could retire 20-30% of current net debt, leverage would stay high.

Greater penetration of the government and corporate customer segment: Zain KSA’s

growing customer base has been price-sensitive consumers (lower income expats, Saudi

youth). The government and corporate segment are generally high-value customers which

would allow the operator to expand margins.

Greater mobile broadband usage could be a catalyst for ARPU increases. As usage

increases, customers start to see the value of data and may be more inclined to pay for it.

6

8

10

12

14

16

18

20



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Zain KSA in charts

Zain Group is the key shareholder Zain KSA’s revenue share (as at Q1 2016)…

Source: Bloomberg Source: Company data, HSBC calculations

… is lower than its market share (as at Q1 2016)…

…because it opted to compete on pricing (ARPU in SAR)


Debt load is not sustainable


37%

12%

51%

Zain Other founders Free-float

60%27%

13%

STC EEC ZAINKSA

47%

27%

23%

3%

STC EEC ZAINKSA MVNO

40

50

60

70

80

90

100

110

120


STC EEC ZAINKSA

-107.4

18.1 14.3 15.0 12.5 8.6

-120

-100

-80

-60

-40

-20

0

20

40

0

2

4

6

8

10

12

14

16

18

2010 2011 2012 2013 2014 2015

Net debt (SARbn) ND/EBITDA (RHS)

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60


Year to 12/2015a 12/2016e 12/2017e 12/2018e


Revenue 6,741 7,596 8,137 8,435

EBITDA 1,629 1,990 2,382 2,610


Operating profit/EBIT -141 105 572 836

Net interest -831 -881 -929 -909

PBT -972 -776 -357 -73

HSBC PBT -972 -776 -357 -73

Taxation 0 0 0 0

Net profit -972 -776 -357 -73

HSBC net profit -972 -776 -357 -73



Capex -1,582 -1,215 -1,629 -1,745


Dividends 0 0 0 0

Change in net debt 213 -638 -71 -95

FCF equity -113 778 69 94




Current assets 4,096 3,891 3,552 3,350

Cash & others 1,378 1,056 794 679

Total assets 26,048 25,335 24,814 24,583


Gross debt 15,362 14,401 14,068 13,859

Net debt 13,983 13,345 13,274 13,179




Year to 12/2015a 12/2016e 12/2017e 12/2018e

Y-o-y % change

Revenue 8.0 12.7 7.1 3.7

EBITDA 48.1 22.2 19.7 9.6

Operating profit 443.5 46.2

PBT

HSBC EPS

Ratios (%)

Revenue/IC (x) 0.4 0.4 0.5 0.5

ROIC 2.8 4.0 6.9 8.6

ROE -19.4 -18.7 -10.0 -2.2

ROA -0.5 0.5 2.3 3.4

EBITDA margin 24.2 26.2 29.3 30.9

Operating profit margin -2.1 1.4 7.0 9.9


Net debt/equity 307.2 354.7 389.9 395.6




EPS Rep (diluted) -1.67 -1.33 -0.61 -0.13

HSBC EPS (diluted) -1.67 -1.33 -0.61 -0.13

DPS 0.00 0.00 0.00 0.00

Book value 7.80 6.44 5.83 5.71

Valuation data

Year to 12/2015a 12/2016e 12/2017e 12/2018e

EV/sales 2.7 2.4 2.2 2.1

EV/EBITDA 11.4 9.0 7.5 6.8

EV/IC 1.0 1.1 1.1 1.1

PE*

PB 1.0 1.2 1.4 1.4

FCF yield (%) -2.5 17.0 1.5 2.1

Dividend yield (%) 0.0 0.0 0.0 0.0


Issuer information


Target price (SAR) 6.35 Sector Wireless Telecoms


Bloomberg (Equity) ZAINKSA AB Analyst Eric Chang


Price relative


3.50

8.50

13.50

18.50

23.50

3.50

8.50

13.50

18.50

23.50

2014 2015 2016 2017

Zain KSA Rel to TADAWUL ALL SHARE INDEX

Financials & valuation: Zain KSA Reduce

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Notes

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62

Notes

63

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Notes

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64

Disclosure appendix

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the

opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their

personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific

recommendation(s) or views contained in this research report: Eric Chang, Herve Drouet and Ziyad Joosub

With respect to the analysis pertaining to the valuation of Indosat in this report, the following analyst certifies that the views

about that subject security or issuer or any other views or forecasts expressed in the analysis of which he is author accurately

reflect his personal views and that no part of his compensation was, is or will be directly or indirectly related to the specific

recommendation(s) or view(s) contained therein: Neale Anderson

Important disclosures

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65

EQUITIES TELECOM

25 July 2016

Rating distribution for long-term investment opportunities

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To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please

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HSBC & Analyst disclosures

Disclosure checklist

Company Ticker Recent price Price date Disclosure

ETIHAD ETISALAT (MOBILY) 7020.SE 28.61 22-Jul-2016 7 ETISALAT ETEL.AD 19.95 22-Jul-2016 7 INDOSAT ISAT.JK 6850.00 22-Jul-2016 6 OOREDOO ORDS.QA 93.90 22-Jul-2016 1, 2, 5, 6, 7

Source: HSBC

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company.

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and/or paid compensation to HSBC in respect of investment banking services.


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and/or paid compensation to HSBC in respect of non-securities services.

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capital, calculated according to the SSR methodology.

EQUITIES TELECOM

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66

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price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument,

and/or (iii) measuring the performance of a financial instrument.

5 As of 15 July 2016 HSBC owned a significant interest in the debt securities of the following company(ies) :SAUDI

TELECOM COMPANY

Production & distribution disclosures

1 This report was produced and signed off by the author on 24 Jul 2016 10:57 GMT.

2 In order to see when this report was first disseminated please see the disclosure page available at

https://www.research.hsbc.com/R/34/nbldBg9

67

EQUITIES TELECOM

25 July 2016

Disclaimer

Legal entities as at 1 July 2016

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and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and

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(P) 021/01/2016

[519287]

Global

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Global Telecoms, Media & Technology Research Team

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