May

2012

Saudi
Telecom Sector

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 AGM - Head of Research
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MAY
2012

Table of Contents

Executive Summary 1
Strong secular growth, led primarily by mobile services 3
Relatively moderate growth in fixed line segment 3
Saudi telecom sector remains attractive 4
Data – a promising pillar of growth 6
Voice market saturating fast 6
Data, the most logical step forward—tremendous potential 9
Saudi Arabia on the verge of a broadband boom 11
Enterprise segment, an untapped area of growth for data services 14
Increasing usage of mobile beyond basic services 17
Transition to next-generation network becomes inevitable 19
Focused growth strategy, strong balance sheet hold key 21
Geographic expansion at the core of STC’s strategy 22
Mobily among frontrunners in wireless data segment 22
STC and Mobily better placed to fund growth 24
Capital restructuring, the top priority for Zain KSA 25
Managing costs efficiently holds significant importance 26
Saudi Arabia Telecom Sector Evolution 31
Regulations in Saudi Arabia’s telecom sector 32
Key Investment Risks 33
Stiff competition to continue exerting pressure on ARPU 33
Competition effect to services quality 33
Liquidity risk 33
Economic and geopolitical risk 33
Valuation analysis 34
Companies that look attractive 35
Saudi Telecom Company 36
MOBILY 40
Appendix 1: Saudi telecom sector— Key metrics 43
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2012

Executive Summary

The Saudi telecom sector is the largest in the Middle East, with over 56.0 mn mobile
subscribers and over SAR77.0 bn in consolidated revenues. After staying dormant until
2000, the sector recorded supernormal growth in the past decade, thanks largely to
liberalization of the sector since 2003. Today, the sector is highly competitive, with private
players vying for market share by aggressively cutting tariffs—in fact, this has been the
trend for five years now. The voice market is fast approaching maturity, with total mobile
penetration reaching 198.0% during 2011. We expect the traditional Voice segment to grow
moderately, given that penetration is already high and competition is intense. However,
there is scope for penetration to increase beyond 200.0%.

The Data segment is expected to emerge as a new area of growth for Saudi telecom
operators, especially since the traditional voice market is maturing fast. The Kingdom’s
young and tech-centric demographics, the rising craze for smart devices, and relatively high
income levels should drive data consumption. Demand for smartphones is also catching on
rapidly in Saudi Arabia, with penetration increasing from 17.0% in 2010 to 25.0% in 2011.
Another key impetus for growth in the Data segment is the rising demand for broadband
services. Despite strong growth, broadband penetration continues to remain comparatively
low in Saudi Arabia. Standard mobile broadband penetration in the Kingdom stood at 9.7%
in 2010, significantly low compared to the developed markets average of 56.6% and the
global average of 17.0%. Fixed broadband penetration was also low at 6.3% compared
to developed markets (25.7%) and the world (8.5%). Strong growth in broadband usage
coupled with a surge in 3G and 4G services is likely to increase demand for high-speed
data consumption and (consequently) drive data revenues. Data revenue is expected to
constitute 25.0% of Saudi telecom operators’ total revenue by 2014 compared to 15.0% in
2011. We expect Mobily to be the clear market leader in this segment primarily due to its
focused strategy aiming at capturing fast growing mobile broadband market. STC would
remain competitive in the fixed broadband market primarily owing to its strong fixed line
network infrastructure.

The Enterprise segment is quickly emerging as a new area of focus for Saudi telecom
operators. The segment is currently highly underserved compared to some European and
developed countries. Saudi Arabia’s robust macroeconomic fundamentals and stable
growth outlook are likely to spur the establishment of new businesses. This coupled with
the growing need for sophistication and better operational efficiency amongst Saudi
companies, especially SMEs, bodes well for the Enterprise segment. Operators providing
one-stop solutions stand a better chance of gaining a competitive advantage in the
Enterprise segment, especially while catering to large corporate accounts. We expect
STC to have competitive advantage over other operators in the enterprise segment.
The company’s ability to cater larger corporate account via fully integrated and bundled
offerings that include fixed and mobile voice, fixed and mobile broadband, internet, data
and ICT services could prove to be a key differentiating factor.

To support the increased data potential, telecom operators are investing heavily to upgrade
their technological infrastructure. STC launched 4G mobile services in partnership with
Nokia Siemens Networks and Huawei for commercial use in Saudi Arabia in late 2011.
Zain also signed partnership agreements with Motorola, Ericsson, and Huawei to offer LTE
services in Riyadh, Jeddah, and Dammam. It plans to expand to other major cities by the
end of 2012.
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2012

Mobily has signed up with Samsung and Huawei to deploy its network, and also has plans
to upgrade its WiMax network. A targeted growth strategy and healthy balance sheet are
key focus areas for Saudi operators, given the rising competition and significant investment
in infrastructure. Both STC and Mobily have a strong balance sheet and are well capitalized
to fund growth.
Commoditization of the mobile voice market and stiff competition in the domestic market
have encouraged telecom operators to reduce tariffs for both standard and bundled
services. STC’s blended ARPU plunged 47.3% during FY2006-11 to SAR72.0. Blended
ARPU is expected to continue declining in Saudi Arabia during 2012-14 due to growth in
subscriber base and price reduction amid aggressive competition. However, the growing
demand for mobile broadband and Value Added Services (VAS) services should help
operators to partially offset the deterioration in ARPU. The rate of decline in ARPU in Saudi
Arabia should fall by 2.0%-2.5% over the next three years. Hence, operators would do well
to manage variable costs efficiently as a means to gain competitive advantage. Initiatives
such as infrastructure sharing with existing operators, optimizing spectrum utilization, and
technology optimization could help operators control variable costs and protect margins.
We initiate coverage on three Saudi Arabian Telecom companies – Saudi Telecom (STC)
and Etihad Etisalat (Mobily), both with Overweight rating. We are considering STC
(potential upside of 31.4%) due to its strong presence in the fast-growing fixed broadband
and enterprise segments. International expansion in high-growth markets also provides
potential to unlock value in the long term. In the case of Mobily (potential upside of 28.1%),
its advantage in the mobile broadband segment and focus on achieving operational
efficiency through cost minimization are key positives.

Figure 1: Our picks from the Saudi Telecom Sector

Unit STC Mobily

12-Month Target Price SAR 55.7 87.4

Potential Upside % 31.4 28.1
Current Market price SAR 42.4 68.3
Market Capitalization SAR mn 84,200 47,775
YTD price change % 25.1 31.9
P/E (12E) X 9.6 8.3
P/B (12E) X 1.4 2.2
EV/ EBITDA (12E) X 5.8 7.1
Dividend Yield (12E) % 4.7 4.8
Source: Zawya, AlJazira Capital
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2012

Strong secular growth, led primarily by mobile services

The Saudi telecom sector has been a model of brisk growth in the past decade. The sector
has come a long way in its transition from a slow, government-owned monopoly to a fiercely
competitive market. The total domestic telecom services revenue grew at a robust CAGR
of 13.2% to SAR60.6 bn during 2005-10. Total sector revenue (comprising of mobile/GSM,
fixed and data and international operations), increased at a CAGR of 17.7% to SAR77.2
bn during the same period. This can be ascribed to the strong growth in subscriber base
(primarily mobile subscribers) since 2004, when the sector was liberalized, making mobile
services more affordable in the Kingdom.
The government’s efforts to open up the telecom sector 2004 onwards proved to be the
key trigger for the phenomenal growth in the mobile segment. The Communications &
Information Technology Commission (CITC) was established in 2003 to promote competition
and provide optimal telecom services in a transparent regulatory environment. As a first
step in this direction, in August 2004, the government awarded a mobile license to UAE-
based Etisalat to compete against and break the monopoly of Saudi Telecom Company
(STC). Competition in the industry intensified with issuance of more mobile licenses in
2007. The entry of new players encouraged companies operating in the sector to ramp up
scale and adopt new technologies. In fact, telecom operators have invested SAR31.0 bn
over the last three years (2008-2011) to upgrade and develop technological infrastructure.
The outcome of this has been beneficial for consumers. ARPU levels have fallen by more
than 50.0% since 2005, and companies have been launching attractive packages since
2005. The mobile segment’s growth can also be ascribed to strong demand side factors,
such as attractive demographics (population growth of 2.5% per annum) and rising income
levels in the last decade.

Relatively moderate growth in fixed line segment

Growth in KSA’s fixed line market has not kept pace with the mobile market, partly due
to a higher established base and the fact that competition in this segment is not very
intense. Fixed line subscriptions increased at CAGR of 3.6% to 4.5 mn since 2001. With 3.3
mn residential fixed line subscribers, household density stands at 73.9% (in other words,
73.9% of Saudi households have fixed lines). Past trends indicate that over the last four
years, household density for fixed lines averaged 73.5%, and has declined from 74.5% in
2006.
Teledensity of fixed lines may increase marginally as a significant proportion of the
population lives in areas that are too remote, or prefer to rely solely on mobile phones. In
fact, in our opinion, 18% of Saudis live in outlying/remote villages, where establishing fixed
line telephony may be not feasible in terms of both cost and implementation.
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2012

Saudi telecom sector remains attractive

The Saudi telecom market witnessed relatively strong growth in 2010 in comparison to
other developing economies in Asia and developed markets in Europe and North America.
Telecom revenue in Saudi Arabia grew 16.0% in 2010 compared to Asia (4.0% growth),
Europe (9.0% growth) and North America (12.0% growth). The overall GCC telecom market
grew 17.0% in 2010.

Kuwait 5.1
South Africa 9.8
Bahrain 9.8
Indonesia 12.6
Malaysia 12.7
Figure 2: KSA telecom—robust revenue growth China 14 . 2
Saudi Arabia 16 . 6
Brazil 18 . 5
Source: Bloomberg, AlJazira Capital
UAE 24 . 2
India 36 . 2

0. 0 10 . 0 20 . 0 30 . 0 40 . 0
CAGR ( 2006 - 10 )

China 8.1
India 10.2
Brazil 12.7
UAE 13.3
South Africa 19.1
Figure 3: Healthy operating margins as well Kuwait 21
Indonesia 23.4
Source: Bloomberg, AlJazira Capital Saudi Arabia 26.6
Oman 31.2

0.00 10.00 20.00 30.00 40.00

Average ( 2006 -10)

Another contributing factor to the robust performance of the Saudi telecom industry is the
growth of broadband penetration at an average CAGR of 123.0% during the last five years.
In 2010 alone, the number of broadband subscriptions increased to 4.4 mn from 2.8 mn in
2009. However, broadband penetration remained low in comparison to developed markets,
indicating there is further room to grow. Overall broadband penetration in Saudi Arabia
stood at 15.6% in 2010, less than the 24.6% average for developed countries, but higher
than the global average of 8.0% and the 4.4% average for developing countries.
The Saudi telecom sector benefits from a favorable demographics profile and relatively
high income levels. Approximately 57.0% of the population is under 30 years of age.
Additionally, the GDP per capita income of Saudi nationals (USD19,890 per person in 2011)
is much higher than other developing economies such as India (USD1,527 per person) and
China (USD5183 per person). Therefore, ARPU levels in Saudi Arabia (USD20.8 in 2010) are
higher compared to other emerging markets like India (USD2.8). Saudi Arabia’s relatively
younger demography and high income levels bode well for the telecom sector.
The Saudi telecom sector’s contribution to GDP was relatively low compared to developed
economies, but better than developing countries such as India, China and Russia. The
telecom sector contributed just 2.7% of Saudi Arabia’s GDP. In comparison, the telecom
sectors of developed economies such as UK and Spain contributed 4.3% and 4.1%,
respectively, of the GDP. Nevertheless, the Saudi telecom sector has potential to grow
further, especially considering that income levels are expected to increase at a healthy
CAGR of 3.5% during 2011-16.
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2012

Figure 4: Our picks from the Saudi Telecom Sector

4.5
Brazil UK
Spain
4
Bahrain

Australia
Telecom Revenue (% of GDP)

3.5 Kuwait
Japan UAE

3
Saudi Arabia Italy
US
China
2.5 Russia Singapore Germany
Oman Canada

2
India
France
Qatar
1.5
0 10,000 20,000 30,000 40,000 50,000 60,000

GDP per capita (USD)

Source: Zawya, AlJazira Capital; Note:

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2012

Data – a promising pillar of growth

Most of the supernormal growth in Saudi Arabia’s mobile segment in the last decade came
from the voice segment. However, high-end data services, including broadband internet,
are expected to lead the next wave. We believe the stage is set for Saudi telecom operators
to capitalize on the Kingdom’s immense potential in the Data segment. Saudi Arabia’s
young and tech-centric population, the growing popularity of smart devices, and the
improved technical capabilities of operators would enable use of richer media content and
drive data consumption. Furthermore, the Kingdom’s significant potential in broadband,
given its current underpenetrated nature, also augurs well for the Data segment. Wireless
broadband, in particular, is likely to receive significant impetus with the introduction of 4G
services. We expect the number of 3G and 4G subscribers to increase significantly over the
next five years, especially with the introduction of mid- and low-end smartphones.
The Enterprise segment is expected to emerge as another growth avenue for Saudi telecom
operators. Currently, the segment is highly underpenetrated with SIM penetration less than
1%. However, Saudi Arabia’s robust macroeconomic fundamentals are likely to spur the
establishment of new businesses. The growing need for sophistication and a cost-effective
‘one-stop-shop solution’ would also encourage telecom operators to tap this segment and
offset saturation in the voice market.

Voice market saturating fast

The voice market is fast approaching maturity with significantly high penetration rates. As
reported by the CITC, the number of mobile subscribers in KSA increased at an exponential
CAGR of 34.0% during 2001-11 to reach 56.1 mn. This pushed total (including in active
subscribers) penetration to 198.0% in 2011 compared to just 12.0% in 2001. The speed at
which penetration increased from 100% to over 140.0% is remarkable. Total penetration
increased from 12.0% to 138.0% in eight years (2001-2008). It took just three years
(2009- 2011) for penetration to advance from 167.0% to 198.0%. Very few emerging and
developed countries in the world have witnessed a penetration spike as rapid as this. Our
analysis suggests that the penetration rate in most developed countries already exceeded
50.0% in the early part of the decade. However, these markets currently lag Saudi Arabia
in terms of penetration.
Another factor that has emerged as a driving force for penetration over the last five years
is the so-called “double-SIM (Two SIM cards/accounts per individual) effect. In our view,
this trend has been induced by factors such as the relatively high number of foreigners/
expatriates using prepaid connections in Saudi Arabia—roughly 87.5% of customers in the
Kingdom use prepaid connections. Expatriates account for approximately 30.0% of the
Saudi population, significantly higher than OECD average of 5.0-7.0%. Foreign workers
and expatriate businessmen living in the Kingdom generally hold more than one SIM/
account. In fact, most businessmen use a smart phone besides their standard phone at the
high end of the market. Furthermore, the propensity of Saudis to spend more has increased
in tandem with rising income levels. Backed by high oil prices during the decade—prices
reached USD147 in 2008 compared to USD23 in 2002—per capita income doubled to
around SAR80,000 (USD19,890) from SR32,900 (USD8,785).

120 . 0 250 %

100 . 0
186 % 198 % 200 %
167 %
80 . 0 56.1
Subscribers (mn)

138 % 150 %
51.6
Figure 5: Voice market fast approaching 60 . 0 113 % 44.8
7.0
81% 36.0 6.3 100 %
maturity with robust growth in mobile market 40 . 0
60%
19.7
28.5
5.5
6.1

40% 4.8 45.3 49.1 50 %

20 . 0 32% 14.1 4.6 38.7
23% 9.2 30.5
12% 7.2 4.6 23.6
5.0 15.1
Source: CITC, AlJazira Capital, * AlJazira estimate 0.0
2.5 9.5
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *

Pre - paid subscribers (LHS) Post - paid subscribers (LHS)

Total subscribers (LHS) Penetration (RHS)

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2012

It is important to consider the active penetration (excluding inactive accounts), while

analyzing the mobile penetration rates in Saudi Arabia. This is due to the presence of
sizeable number of inactive accounts in Saudi Arabia which may give a misleading picture
with reference to mobile penetration. This can be gauged from the fact that penetration of
active mobile subscribers (SIMs which have been in use in the last 90 days) stood 165.4%
in 2011 compared to total penetration of 198.0%. In our opinion, the large number of
inactive accounts can be ascribed to significant number of religious and business travelers
visiting Saudi Arabia who require access to temporary SIMs. According to Kingdoms’
Ministry of Hajj on an average 2.5-3.0 mn religious tourists visits Saudi Arabia each year
for pilgrimage. Massive flow of religious tourists visiting Saudi Arabia for Hajj coupled with
temporary business travelers play a key role in influencing inactive mobile accounts.

42.2
40 36.4 37.8 160%
29.8

Subscribers (mn)
30 120%
23.9
17.9
Figure 6: Active penetration is high as well 20
13.4
80%

Source: CITC, AlJazira Capital 10 7.2 9.0 40%

3.0 5.0
0 0%

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011 *
Active subscribers (LHS)
Active penetration (RHS)

250
196
200
Mobile Penetration %

165 161
145
150 132 131 127
Figure 7: Comparatively high penetration* 101 90
100
Source: CITC, ICT, AlJazira Capital, *Active penetration 64 61
50

0
Hong…

UAE
KSA

UK

US
France

China
Kuwait

Qatar

Germany

India

Outlook for voice segment: Moderate growth expected

We believe the traditional voice market is fast approaching maturity and saturation, with
overall penetration reaching 198.0% during 2011. The growth would be moderate and
difficult to come by with ever increasing competition, especially when CITC is planning to
issue licenses to Mobile Virtual Network Operators (MVNO), which, thus far exist only in
Oman within the GCC region.
We believe that with such high penetration levels and the likely entry of MVNOs, the traditional
voice market would take a breather in terms of growth in subscriber base/penetration.
However, there is still room for penetration to increase beyond 200.0%. This, in our view,
can be attributed to the potential for use of multiple SIMs by low-income Saudis and
expatriates. Another key potential driver of penetration in the voice segment is the growing
demand for smart phones. This would be complemented by the anticipated healthy growth
in population. IMF expects KSA’s population to grow 2.2%-2.5% during 2011-2016, which,
in our opinion, would add 7.9 mn new subscribers by 2014. Consequently, we expect
mobile penetration in KSA to reach 211.0% in 2014 after increasing to 209.0% in 2013. We
further anticipate active penetration rate to increase to 175.4% and 177.1% in 2013 and
2014, respectively.
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2012

46.0 185%
44.5
44.0 43.4 180%
42.3
42.0 41.2 175%

Subscribers (mn)
Figure 8: Moderate growth in mobile 40.0
40.2
170%
penetration (2012F-2016F) 38.0
37.8
165%
Source: AlJazira Capital
36.0 160%

34.0 155%

2011E

2012F

2013F

2014F

2015F

2016F
Active subscribers (LHS) Active penetration (RHS)

Extracting further value from subscribers will be pivotal

Over the last five years, Saudi telecom operators focused on capturing market share in
the Voice segment by aggressively adding new subscribers. However, this came at the
expense of declining ARPU levels, as operators lured subscribers by reducing voice tariffs.
According to our estimate, Saudi Arabia’s blended ARPU plunged 56.7% during 2005-10
to SAR78.0, as both STC and Mobily reduced mobile tariffs to add subscribers. However,
now that penetration has reached as high as 198%, these operators need to revisit their
strategy and focus on deriving additional revenues from existing customers by increasing
usage per subscriber. In other words, operators need to shift focus from gaining market
share to being competitive. One such strategy adopted by players, such as STC and Mobily,
is to increase the proportion of postpaid subscribers in the total subscriber base. This
can be evinced from the fact that growth in postpaid subscribers (11.0%) outpaced the
growth in prepaid subscribers (8.4%) for the first time during 2011. Mobily’s management
claims 12.0% of its subscribers currently hold postpaid connections, and this is expected
to grow further in the coming years. Around 25.0% of STC’s subscribers have postpaid
connections. With the traditional Voice segment reaching maturity, operators would need
to derive additional value from existing customers by increasing usage per subscriber.

60 100 . 0 %
90 . 0 %
50
80 . 0 %
70 . 0 %
40
60 . 0 %
Figure 9: Growth in prepaid Vs post paid
Subscribers

30 50 . 0 %

subscribers 20
40 . 0 %
30 . 0 %
Source: AlJazira Capital 10
20 . 0 %
10 . 0 %
0 0.0%
2005 2006 2007 2008 2009 2010 2011 E

Prepaid subscribers (LHS) Post paid subscribers (LHS)

Prepaid subscribers growth% (RHS) Post paid subscribers growth% (RHS)
MAY
2012

Data, the most logical step forward—tremendous potential

Given the limited growth prospects in the traditional voice market, the Data segment has
emerged as logical option for Saudi operators to seek alternative revenues and mitigate
slowdown in the Voice segment. The Data segment holds tremendous potential for growth,
given that internet is fast achieving mass market exposure in Saudi Arabia. Value-added
services (VAS), which is typically reported under the Data segment, is set to surge as a
percentage of total revenue for Saudi telecom operators. Data revenue in Saudi Arabia
is still low at approximately15% of the total revenues when compared to 40.0% for the
developed markets of the world. We believe strong underlying growth drivers are in place
to drive data consumption.

Young, tech-centric population

Saudi Arabia is the most populous country in the GCC. The Kingdom’s population (around
28 mn 2010) has been growing at an average rate of 2.5% each year during the last five
years. The population is expected to continue growing at the same rate in the coming
decade. In addition, the population of Saudi Arabia is one of the youngest in the world, with
57.0% below the age of 30 compared to UAE (49.6%), Kuwait (54.4%), Bahrain (49.5%),
and Qatar (44.8%). In terms of the ratio of population below the age of 30, Saudi Arabia
also compares well with other emerging countries such as China (43.2%), Brazil (50.9%),
Russia (37.1%), and Malaysia (56.2%). This is a crucial factor for growth in mobile services,
especially for the Data segment, as the youth are generally more tech-savvy and adopt
new products and services quickly. Besides, with around 8 mn expatriates, this segment
accounts for 30.0% of the total population. We believe the expatriate population is another
important contributor to growth in the mobile data segment.

28 8 3 3 1 2 1,233 1,360 198 147 50 29 49

100 %
90 %
80 % 43.0 37.1 42.1 40.7 43.8
50.4 45.6 50.5 49.1
70 % 55.2 56.8 62.9 63.2
60 %
Figure 10: Saudi Arabia’s young 50 %

population base 40 %
30 % 57.0 54.4
62.9 57.9 59.3 56.2
49.6 49.5 44.8 50.9
20 % 43.2 37.1 36.8
Source: United Nations Population Department, 10 %
AlJazira Capital 0%
Saudi Arbia

UAE

Kuwait

Oman

Bharain

Qatar

India

China

Brazil

Russia

South Africa

Malaysia

S.Korea

15 - 29 age group Other age groups Tota l population (mn)

Smart devices catching on

Saudi Arabia’s young population demographics, rising income levels and an expanding
electronics retail sector have fueled demand for smart devices like notebooks, smartphones,
3D technology, PDAs and 3G handsets, and high-end gaming and digital solutions.
Smartphones are catching on fast in Saudi Arabia, given the enhanced user experience,
superior technical capabilities and support for various applications and services. Since
the launch of Blackberry in 2006, the Saudi market has been flooded with new devices
by leading handset manufacturers. Apple’s i-phone 3G made its first appearance when
Mobily launched it in 2009. Google Android smart phones, currently led by Samsung and
HTC products, have also entered the Saudi market in the last two years. Consequently, the
smartphones segment exhibited rapid growth in Saudi Arabia, with penetration increasing
to 25.0% in 2011 from 17.0% in 2010. According to Informa, a leading telecom data
provider, the penetration of smartphones in Saudi Arabia is expected to reach 44.8% by
2015. With increasing demand for smart devices, demand for data services is likely to
increase significantly in the coming years.
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Evolution of mobile devices

High income bracket

( Young/af f luent/
corporates/

Mid income bracket

( Young population)

Low income
bracket ( Mass )

MMS
Browsing
Camera

Broadband
Voice

SMS

services
Music

f inancial

computing
E-mail
networking
Gaming

Internet

Mobile

internet

Basic
Social
44.8%
Smartphones share

Figure 11: Growth in smartphones 25.0%

penetration to drive demand for data Basic and feature

phones share
55.2%
Source: Informa, AlJazira Capital l 75.0%

2011 2015E
MAY
2012

Saudi Arabia on the verge of a broadband boom

Development of the internet and broadband market plays a crucial role in influencing the
demand for the data segment as it complements high-speed data provisions, applications
and high-end gaming, and digital solutions. Although a recent phenomenon in Saudi
Arabia, broadband internet has grown significantly over the last five years. The Kingdom
is currently on the verge of a broadband boom with subscribers increasing at a CAGR of
133.5% to 4.4 mn during 2005–10. The number of standard broadband subscribers grew
31.3% Y-o-Y in 9M 2011, resulting in an overall penetration rate of 20.6%. The growth in
the number of users can be ascribed to wider internet access, higher public awareness,
and improvement in technological infrastructures. However, majority of this growth has
come from wireless (Wimax & Mobile HSPA) broadband, the growing use of which enables
customers to use a variety of data packages. Wireless connection accounted for 60.8% of
total broadband connection in 2010, up from 47.6% in 2009.

7.0 25.0%
0.064 0.220 0.646 1.075 2.750 4.440 5.830

6.0 20.6%
20.0%
5.0
CAGR (2005-10)-133.5% 15.6%
15.0%
Subscribers (mn)

4.0 3.7
Figure 12: Broadband market growing fast in 3.0 10.3% 2.7 10.0%
Saudi Arabia 2.0 1.3

Source: CITC, AlJazira Capital, as of 9M 2011, Note: Broadband 1.0 2.6% 4.1% 2.13
5.0%
1.74
subscribers for 2011 does not include Dedicated Mobile Data 0.3% 0.9% 1.04
1.44
0.62
Subscriptions classified by CITC 0.0 0.22 0.0%
2005 2006 2007 2008 2009 2010 2011*

Fixed subscribers (LHS) Mobile subscribers (LHS)

Total broadband penetration (RHS) Total broadband subscribers (mn)

Despite strong growth in the broadband market, penetration levels continue to remain
comparatively low in Saudi Arabia. Standard mobile broadband penetration1 in the
Kingdom stood at 9.7% in 2010, lower compared to the developed market average of
56.6% and world average of 17.0%. Furthermore, it remains low compared to some of
the regional counterparts such as Bahrain (25.0%) and Oman (14.0%). At 6.3%, fixed
broadband penetration was also lower compared to that of developed markets (25.7%)
and the world (8.5%). Low broadband penetration, especially mobile broadband, provides
an attractive opportunity to boost data revenue and offset the likely slowdown in the
traditional voice segment. The uptrend in the number of broadband users is expected to
continue; the Kingdom is likely to add 7.2 mn new standard broadband users by 2016.
We believe the broadband growth cycle in Saudi Arabia would peak in 2012 with total
subscribers increasing 32.4% Y-o-Y to 7.7 mn.

Oman 1.6
Kuwait 1.7
Egypt 1.8
Developing markets 4.8
Figure 13: Low fixed broadband penetration KSA 6.3
Source: ICT, AlJazira Capital Qatar 8.2
World 8.5
UAE 10.5
Bahrain 21.0
Developed markets 25.7

0.0 5.0 10.0 15.0 20.0 25.0 30.0

1. Excluding subscriptions to dedicated data services over a mobile network which are purchased separately
from voice services as a stand-alone service
MAY
2012

Egypt 1.0
UAE 3.0
Developing markets 8.5
Figure 14: Low mobile broadband Kuwait 9.7
KSA 9.7
penetration
Qatar 14.0
Source: ICT, AlJazira Capital Oman 14.0
World 17.0
Bahrain 25.0
Developed markets 56.6

0.0 10.0 20.0 30.0 40.0 50.0 60.0

Wireless broadband (Wimax & Mobile HSPA) to drive growth in data

Although both mobile and fixed line broadband subscriptions are expected to surge, the
former is likely to lead. Our rationale is based on the growing demand from the youth,
increased affordability and growing popularity of smart/lifestyle mobile devices, and
limited entertainment avenues in Saudi Arabia. With regard to supply side drivers, lack of
technological infrastructure is no longer a hindrance as 3.5G/HSPA mobile services have
emerged as an alternative to traditional copper-based fixed line DSL technology. Faster
HSPA broadband is further supported by 21Mbps speed that would fuel broadband growth.
Both STC and Mobily are well equipped, with 3.5G Wimax network, to support high-speed
broadband. In addition, operators such as Mobily and Zain are aggressively investing in the
acquisition of 4G and LTE (Long-Term Evolution). (The same has been discussed in detail
in the following section on technological development and mobile infrastructure in Saudi
Arabia.)
We believe the following factors would also prove to be the key triggers for mobile
broadband growth outpacing fixed line broadband.
• Operators may not find it economically feasible to cover the entire Kingdom through
landlines given its huge land mass.
• There is a probability of multiplicity of connection in case of HSPA subscriptions as
they are sold to individuals and not distributed among an entire household.

Launch of 3G and 4G services provides further impetus for data consumption

Demand for 3G and 4G services would be a key growth driver for the data segment, in our
view. Our rationale is based on the fact that the data consumption level of 3G subscribers is
45% higher than that of 2G subscribers. Furthermore, owners of 4G-enabled smartphones
(such as i-Phone 4) use around 1.5 times more data than 3G owners. Hence, demand for
3G and 4G services would be crucial for sustaining growth in the data segment. In light of
this, we present below our analysis of how the 3G and 4G market in Saudi Arabia is likely
to progress in the next five years.
The 3G subscriber base in Saudi Arabia has grown significantly in the last couple of years
largely due to surging demand for high-speed internet amid increasing craze for devices
such as smartphones and tablets. The 3G subscriber base has increased more than 50.0%
during the period, and currently accounts for approximately 14.0% of total subscribers.
While this would support the increasing data consumption, extension of 4G services in the
Kingdom is likely to boost growth further. As discussed earlier, major players have invested
in the acquisition of 4G technologies, and have tested LTE (commercially known as 4G)
networks.
MAY
2012

Telecom operators in Saudi Arabia are likely to increasingly adopt 4G technologies to meet
the surge in demand for data services. However, demand for 4G is highly influenced by
factors such as consumers’ acceptance of high-tech technology, income levels (4G services
would be expensive vis-à-vis 3G) and demand for sophisticated services. Historically,
Saudi Arabian consumers have not been very flexible with regard to acceptance of high-
tech technology (3G was launched only in 2010) compared to some of the developed and
emerging markets. However, the trend is quickly reversing as the younger generation is
becoming tech-savvy. This can be gauged from the significant growth in the 3G subscriber
base within just two years of its launch in the Kingdom. This coupled with rising income
levels of the younger generation hold significant latent potential for 4G services in Saudi
Arabia.
In the near to medium term, demand for 3G is expected to continue outpacing 4G as the
market is still highly underserved compared to few developed markets. Also, 4G service in
the Kingdom is in its infancy as operators continue to tackle the challenges of revamping
the technological infrastructure needed to support it. We expect the 3G subscriber base
to increase at a CAGR of 14.6% to 27.7 mn during 2011–16. On the other hand, growth in
the 4G subscriber base is expected to accelerate post 2013; it is expected to expand at a
CAGR of 51.3% to 11.8 mn during 2013–16. Accordingly, we expect 3G and 4G penetration
in Saudi Arabia at 87.7% and 37.5%, respectively, by 2016.

30.0 27.0 27.7

25.6
25.0 23.6
21.0
Subscribers (mn)

20.0
14.0
Figure 15: Growth in 3G & 4G subscribers 15.0 11.82
Source: AlJazira Capital 10.0 7.2 8.24
4.80
5.0 3.41
2.04
0.01
0.0
2010 2011E 2012F 2013F 2014F 2015F 2016F

3G subscribers 4G subscribers

100% 0.02 3.4 5.5 7.5

90% 14.0 12.5 17.5
25.0
80% 35.0 38.0
70% 40.0
41.0
60% 41.0
Figure 16: Share of 3G & 4G subscribers % 50%
40% 86.0
Source: AlJazira Capital 75.0
30% 61.6 56.5 52.5 46.5
20% 41.5
10%
0%
2010 2011 E 2012 F 2013 F 2014 F 2015 F 2016 F

2G Subscribers 3G Subscribers 4G Subscribers

We believe the strong growth in mobile broadband usage and the surge in demand for 3G
and 4G services are likely to boost the demand for high-speed data consumption. This,
in turn, would boost the VAS revenue of telecom operators which is typically reported
under data revenues. Data revenue’s contribution to total revenues is low for Saudi Arabia
(accounting for approximately 15.0%) compared to that for developed markets (40.0%)
and emerging markets such as China (22.0%).
We expect data revenues to rise quickly in the coming years with increased data
consumption and usage of VAS. Accordingly, we project data revenue, as percentage of
total revenues, for Saudi Arabia to increase to 25.0% in 2014.
MAY
2012

KSA 15
Malaysia 18
Korea 19
Taiwan 20
Figure 17: Low share of data revenues (%) Singapore 21
Source: AlJazira Capital China 22
Australia 25
Developed markets 40
HongKong 42
Japan 60

0 10 20 30 40 50 60 70

30.0%
25.0%
25.0%
Data as % of total revenue
21.0%
20.0% 17.0%
Figure 18: Data revenues expected to surge 15.0%
15.0% 12.6%
Source: AlJazira Capital
10.6%
10.0% 8.4%

5.0%

0.0%
2008 2009 2010 2011E 2012F 2013F 2014F

Enterprise segment, an untapped area of growth for data services

The enterprise/corporate segment holds significant growth opportunities for telecom
operators in Saudi Arabia that are yet to be tapped. According to Booz & Company,
enterprise SIM penetration in MENA countries, including Saudi Arabia, stands at less
than 1.0% relative to 6.5% in European nations. Also, Information and Communication
Technology (ICT) spending in Saudi Arabia is currently less than one-fifth of that in Western
Europe and just one-tenth of that in the US. Furthermore, revenue from the enterprise
segment accounts for 17.0% (on average) of the total revenue for major European
operators. This provides ample opportunity for Saudi telecom operators to tap this market,
especially considering that the Kingdom’s macroeconomic fundamentals are sound. This,
in our opinion, is crucial as demand for telecom services from the corporate sector is highly
correlated to the economy’s performance.
The Kingdom’s economy proved its resilience during the financial crisis of 2008 and
emerged relatively unscathed from global economic slowdown. After remaining flat
during 2009, the Saudi Arabian economy grew a healthy 4.1% in real terms during 2010.
Provisional numbers indicate that the Kingdom’s GDP is likely to expand 6.1% in 2011,
where listed companies combined earnings grew 24.0% Y-o-Y during 9M 2011. The IMF
expects Saudi Arabia’s economy to grow at an average annual rate of 4.7% over the next
five years. KSA, which was ranked 11th among 183 economies and the first in the MENA
region in terms of ease of doing business in 2011, is expected to witness a substantial flow
of new businesses.
MAY
2012

The Kingdom’s economy is fast moving from being traditionally oil-based to service-oriented,
largely due to the government’s diversification efforts. This, in turn, would require businesses
to become more sophisticated in their infrastructure need. Saudi businesses would need
advanced telecom services that can improve their efficiency and competitiveness. Enterprise
demand for high-end telecom services (such as data services) holds significant potential in
Saudi Arabia, given the increased need for mobility, seamless integration of communication
functionality and web-based technologies. In addition, government initiatives are contributing
to the growing need for advanced telecom services. The government has launched several
e-projects that require major development of the telecommunication sector under the
National Communications and Information Technology Plan (NCITP). Development of the
King Abdullah Science Park (KASP) and Information & Communications Centre (ITCC) are
two examples of the initiatives undertaken by the government.

100%
90%
80%
70%
Figure 19: High proportion of enterprise 60% 74.7%
83.0%
84.1% 85.8%
Revenue mix

revenue for European operators (2010) 50%

40%
Source: GOSI, AlJazira Capital 30%
20%
10% 25.3%
15.9% 17.0% 14.2%
0%
Swisscom Orange Telstra TeliaSonera

Enterprise Consumer

SME segment lucrative

The number of business establishments in Saudi Arabia increased at a CAGR of 15.7%
during 2004–09. This growth is largely driven by small and medium enterprises (SMEs),
which are an integral part of the business environment in KSA. The number of SMEs in
Saudi Arabia rose at an average annual rate of 20.0% during 2004–09, accounting for more
than 97.0% of the total business establishments. SMEs are also increasingly acquiring
sophistication with the growing need for mobile and data services. SMEs are looking for
integrated and customized cost-effective solutions to meet their mobile and data services
needs. Furthermore, as SMEs in Saudi Arabia do not have in-house IT capabilities, there
is ample opportunity for telecom operators to provide services that would help these
businesses meet their specific objectives such as reduction in costs, increase in productivity
and improvement in customer satisfaction.
The number of business establishments as well as their telecom expenditure is expected
to increase substantially, considering the positive macroeconomic outlook for the Kingdom
and its improving business environment. Number of business establishment Saudi Arabia
is expected to register a healthy growth of 12.0% during 2010-2014. Robust increase in
the number of enterprises in Saudi Arabia presents a key growth opportunity for telecom
operators.

400
1.6x
2.5x 8.7
350
CAGR CAGR
Total: 15.7% Total: 12.0% 7.7
300
6.8

Figure 20: Growth in business establishment to 250

5.5
6.1
5.1
N. of enterprise (000')

boost demand for corporate telecom services 200 4.8 362.2

4.6 317.8
150 283.7
4.4
Source: GOSI, AlJazira Capital 4.1 230.3
253.3
100 213.2
19.8 187.8
159.1
117.5 133.6
50 85.6

0
2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E

SME Large SMEs, Micros and others

MAY
2012

How to target SME segment effectively?

• Identify customers based on key indicators such as telecom expenditure and service
sophistication.
• Design customized and bundled solutions that would provide “under one roof”
experience. For instance, STC’s Flex plan is a postpaid plan that works with prepaid
recharge vouchers. This allows SMEs to control their budgets by setting a fixed credit
amount, which employees can access on monthly basis.
• Provide high-end SMEs solutions that would require minimal investment upfront (for
instance, software-as-a-service (SaaS) and cloud computing services).

In our opinion, the following business areas offer attractive opportunity in the broad
enterprise segment:
• Net working services that are seamless and improve productivity; operators can offer
integrated platform for voice, video, internet, messaging and other data services.
• Services providing comprehensive connectivity across branches, regions and nations.
• Management and maintenance of corporate network, cloud computing, and ancillary
services such as implementation and management of network security.
• Real time services such as Internet Protocol telephony (IP) telephony, e-mail, and
instant messaging, among others.

Branch Offices

Home Offices
E-Mail (SOHO)
ERP
VOIP
Figure 21: Strong potential for end- Video Calls

to-end enterprise solutions Data Centre/Network

Headquarters

control
Source: AlJazira Capital WAN

Internet
MAY
2012

STC competitively positioned in enterprise segment; Mobily playing catch up

STC dominates the enterprise segment of the Saudi telecommunication industry, with more
than 435,000 corporate accounts. The company has significant presence in SME segment,
which accounts for 98.6% of its total corporate accounts. This indicates that STC must
tap large business accounts to maintain its dominant position and generate more value
from the enterprise segment. Mobily, although a late entrant, is increasingly capturing
large corporate accounts. The company’s deployment of the LTE infrastructure as well
as its recent strategic partnership with Google Inc to provide high support for enterprise
computing would help it in this regard. It has already secured some big-ticket corporate
clients. For instance, Mobily was selected by SABIC for its IP VPN project, and chosen by
the General Organization for Social Insurance (GOSI) for the Wahat Ghurnatah business
park.
We believe providing one-stop solutions would be the key to gain competitive advantage in
the enterprise segment, especially while catering to large corporate accounts. STC offers
fully integrated offerings that include fixed and mobile voice, fixed and mobile broadband,
internet, data and ICT services. The company is engaged in developing the telecom
infrastructure in new economic cities, focusing on services such as broadband, fiber-to-
the-factory, Wifi, WiMAX and VAS. The product roadmap includes managed as well as
advanced services such as cloud computing and M2M-based services. We believe STC
has the scale as well as the advanced infrastructure required to grow in the enterprise
segment. The company was the first operator to launch a cloud-based eHealth solution,
Easy Clinic. In addition, STC’s experience in serving big-ticket corporate accounts would
give it a competitive edge, in our opinion. Its corporate clientele includes top Saudi Arabian
organizations such as government ministries and major companies.

Increasing usage of mobile beyond basic services

• Mirroring the trend in developed as well as emerging markets, consumers in Saudi
Arabia are using mobile phones for several services beyond basics. Some of these are
mobile financial services (MFS), e-commerce and healthcare-related services. MFS,
particularly, has been gaining rapid traction over the last few years due to the dominant
role of capital and financial markets in the Kingdom’s economy. Although the service is
in its nascent stage in Saudi Arabia, the potential for growth is significant, considering
that financial institutes are looking to provide innovative and cost-effective banking
solutions to customers through mobile phones. Internet and mobile banking services
are rapidly emerging as major sources of information, sales and service; and efficient
channels to interact with customers. In our view, Saudi Arabia is at an advantageous
position to capture the MFS opportunity due to the following key factors:
• Established electronic platforms, such as the SADAD payment system, in the Kingdom
provide a strong foundation. SADAD, a national electronic billing and payment (EBP)
service, facilitates faster and more efficient centralized electronic billing and payment
for consumers and business customers.
• Strong regulatory bodies such as the SAMA and CITC in KSA seek to create a
standardized system.
• The Kingdom has a large expatriate population compared to other emerging markets.
This opens up avenues for services, such as fund transfer, through mobile phones.
• Policies and legislative reforms by the SAMA ensure a strong legal framework for
financial services.
We believe MFS offers telecom operators the opportunity to complement and expand
current offerings, and differentiate themselves from competitors in the long term.
MAY
2012

A PEEK INTO 3G and 4G technology

3G technology
3G refers to the third generation mobile telephony and wireless technology. It
facilitates the transfer of voice and non-voice data (music downloads, emails and
instant messaging) over the same network simultaneously. The 3G technology helps
in increasing the bandwidth, facilitates multiple mobile applications and ensures clarity
of digital signals. It transmits packet switch data efficiently at better and increased
bandwidth, and offers more advanced services to mobile users. The spectral efficiency
of 3G technology is better than that of previous mobile technologies. It can facilitate
several multimedia services. Compared to earlier technologies, 3G:
• Offers several times higher data speed
• Enhances audio and video streaming
• Supports video conferencing
• Facilitates web and WAP browsing at higher speeds
• Supports Internet Protocol television (IPTV)

Key features and technical specifications of 3G:

• The transfer rate of 3G networks is between 128 kilobits per second (kbps) and 144
kbps for fast moving devices, and 384 kbps for slow moving. For fixed wireless LANs,
the speed goes beyond 2 Mbps.
• 3G technology standards include W-CDMA, WLAN and cellular radio

4G technology:
4G is a fourth generation mobile telephony and advanced wireless technology. It is a
successor of the 3G 4G, the fourth generation mobile telephony and advanced wireless
technology, is a successor to the 3G and 2G families of standards. 4G is not one defined
technology or standard, but a collection of technologies and protocols aimed at creating
fully packet-switched networks optimized for data. The technology, still in its infancy,
is projected to provide speeds of 100 Mbps while moving and 1Gbps while stationary.
Benefits of 4G over 3G
• High speed video streaming, TV broadcast, video calls and video clips
• Enhanced gaming, chat and location services
• Less complex, faster transmission
• High speed teleworking/VPN access, sales force automation, video conferencing and
real time financial information for companies
MAY
2012

Transition to next-generation network becomes inevitable

The Saudi telecom sector has transformed significantly over the last decade in terms of
technological capabilities. With just a single player providing basic GSM services and
internet facilities on dial-up and fixed line (PSTN) network, the telecom infrastructure in
Saudi Arabia was well behind that in developed and some developing economies at the
start of this period. However, liberalization of the sector in the latter half of the decade,
which resulted in the entry of new companies, inflow of large investments and faster
adoption of new technology, helped it to surpass some of the developed economies.
A latecomer in technology adoption, the Saudi telecom sector has avoided issues
associated with large legacy systems that could have been a bottleneck in upgrading to
the new network infrastructure. KSA’s telecom sector currently offers full capacity 3.5G
HSPA services for mobile applications in addition to limited long-term evolution (LTE, also
known as 4G) networks. Furthermore, industry players such as STC are exploring the
option of offering triple play services with the convergence of IPTV, internet and phone
services into one package following the implementation of the next-generation network
(NGN) technology.

Figure 22: Saudi Arabia’s telecom sector – industry life cycle of technology adoption
Source: CITC
Fixed
Mobile
ERP Solutions telephony
telephony
Internet
Video Conferencing
MMS
Mobile Broadband (3G) Frame relay services
Mobile broadband
(WIMAX/ LTE)
ADSL Broadband
WIMAX Broadband
Managed Security
Services
Mana ged CPE
Services
IP -VPN
Services

IPTV
FTTH Services

Market
Introduction Growth Mature Saturation Decline

Stages of Industry Cycle

Although the fixed telephony market has been on a decline of late, the fixed line technology
is getting a new lease of life with STC (dominates the fixed line market in Saudi Arabia)
investing in the NGN technology. STC would replace the existing fixed line infrastructure
in a phased manner between 2009 and 2012. This is expected to result in operating cost
savings and higher broadband speeds up to 100 gigabytes per second. The increased
internet speed due to the improved fixed line technology is expected to enable STC to
facilitate high bandwidth applications such as video and television through its triple play
offerings.
MAY
2012

In Saudi Arabia, telecom operators have switched rapidly from 2G mobile networks to
3.5G, while some such as Mobily, Zain KSA and STC offer 4G networks. STC launched 4G
mobile services in collaboration with Nokia Siemens Networks and Huawei for commercial
use in Saudi Arabia in late 2011. Ericsson would continue to be STC’s leading vendor for
the deployment of 4G networks across Saudi Arabia, besides managing its 2G and 3G
networks. Zain has signed a partnership agreement with Motorola, Ericsson, and Huawei to
offer LTE services in Riyadh, Jeddah, and Dammam; it also plans to expand to other major
cities by the end of 2012.
Mobily’s strategy is the exact opposite of Zain’s—the company would launch 4G services
in smaller cities before expanding to major ones. Mobily has tied up with Samsung and
Huawei to deploy its network. Furthermore, it plans to upgrade its WiMAX network to LTE
in the near future through the Bayanat al Oula acquisition.
Saudi Arabia is expected to surpass European countries in LTE adoption—it is estimated
to reach 12.5% of all subscriptions in KSA by 2015 relative to just 3.4% in 2012. This
implies the Saudi telecom sector would need considerable investments in either network
upgrades or maintenance of ongoing operations. According to Saudi Arabia’s economy
minister, investments in the telecom sector would reach around SAR37 bn in 2013 and
SAR50 bn in 2015.
MAY
2012

Focused growth strategy, strong balance sheet hold key

Since the liberalization of the Saudi telecom sector in 2004, operators have focused on
capturing market share. Players such as Mobily and Zain KSA have captured significant
share from market leader Saudi Telecom over the last five years. STC continues to lead
the pack with 45.0% share (in terms of total subscriber base) in the domestic market in
FY2011. Mobily commands 38.3% and Zain KSA 16.7%. Hence, vying for market share
by reducing ARPU levels and offering attractive packages has been at the core of the
strategy pursued by these telecom operators since 2005. However, with the domestic voice
market fast approaching maturity, operators have shifted focus to increasing revenue from
alternative streams such as mobile data (VAS in particular), a largely untapped segment
in the Kingdom. This requires significant capital expenditure (capex) on improving the
technological infrastructure (upgrading existing legacy network and moving towards 4G/
LTE) to stay ahead in the competition. As discussed earlier, Saudi Telecom, Mobily and Zain
have already committed significant capital expenditure in upgrading their technological
infrastructure. In this scenario, we believe an operator with a targeted growth strategy and
healthy balance sheet would lead the market.
In the following section, we discuss the growth strategy of Saudi telecom operators and
assess how they are placed against each other:

16.7%

Figure 23: STC continues to lead the market

Source: Company filings, Tadawul, AlJazira Capital 45.0%

38.3%

STC Mobily Zain

100% 5.6
15.6 11.7 15.7 16.7
90%
30.9 39.0
80%
Market share (No. of

70% 41.2
40.9
subscribers)

38.8 38.3
60%
Figure 24: However, market share on decline 50%
40% 84.4
Source: AlJazira Capital 69.1 61.0
30% 53.2
20% 47.4 45.5 45.0
10%
0%
2005 2006 2007 2008 2009 2010 2011

STC Mobily Zain

MAY
2012

Geographic expansion at the core of STC’s strategy

With the domestic telecom market nearing maturity and amid increasing competition,
expanding footprint in international markets is becoming a key aspect of the strategy of
telecom operators. However, of the telecom operators in KSA, only STC has successfully
expanded in international markets. The company has increased operations abroad with
around USD6.0 bn of foreign investments since 2007. Starting with the acquisition of
Binariang, the private parent arm of Malaysian mobile operator Maxis, STC today operates
in 10 countries. In another significant move, STC acquired 35% stake in Oger Telecom, a
private company with assets that include majority holdings in Turk Telekom and Cell C of
South Africa.
As things stand, international business has become an integral part of STC’s overall
strategy. Revenue from international operations contributed 32.3% to the company’s total
revenue in FY2011. STC plans to increase the share of revenue from foreign markets to
50.0% by FY2014.
This would require substantial capital expenditure and commitment on the part of the
management. STC’s international expansion gives it a competitive advantage—the
company is able to diversify its revenue stream, hedging against saturation in the domestic
market. Major competitors Mobily and Zain are yet to explore the overseas market; this
leaves them vulnerable to domestic market dynamics. In addition, STC may benefit from
early mover advantage, given its large international operations.
However, STC is yet to unlock value from its international operations. Despite international
revenues coming in at a significant 32.3%, their contribution to the bottom line is negligible.
This can be primarily ascribed to the high initial cost of setting up operations and capex.
Although operations in Malaysia, Turkey and South Africa have already started generating
returns, those in countries such as India and Indonesia would require significant investments.
Besides, market dynamics in most of these geographies (intense competition, falling
ARPUs, high capex requirement primarily to upgrade the technological infrastructure) are
similar to those in KSA. Moreover, STC’s minority stake in these operations remains a cause
for concern as it may lead to a potential mismatch of strategy with majority shareholder.
Thus, while international operations have a significant upside potential in the long term,
scaling up their contribution to the bottom line is an issue for STC. Generating attractive
returns from the international market after incurring heavy capex is expected to pose a key
challenge to the company.

Mobily among frontrunners in wireless data segment

As discussed earlier, the mobile data segment has emerged as a fast growing market over
the last couple of years. The segment has tremendous growth potential, considering the
increasing demand for smart devices and the Kingdom’s underpenetrated broadband
market. The segment is expected to play a crucial role in offsetting the likely slowdown
in the traditional voice market. Competition in KSA’s broadband market is increasing
with operators rolling out innovative data plans to lure customers. All three operators –
STC, Mobily and Zain KSA – offer competitive broadband packages. In addition, they are
constantly introducing new services and combinations or “bundled” services. The latter
also help in reducing the churn rate as it would be inconvenient for consumers to shift
all services from one provider to another. In addition to innovative services, operators
are increasingly offering discounts on new data packages. (We have discussed about
bundled services and innovative packages offered by the Saudi operator at length in the
sections below.) Furthermore, all three operators have invested heavily in shifting to the LTE
technology. KSA already has a 4G operator, Etihad Atheeb, which offers WiMAX services
and broadband packages with speeds up to 2Mbps as well as VoIP services.
MAY
2012

Our analysis of competition in KSA’s data segment suggests that Mobily is a clear leader.
Mobily’s revenue from the data segment increased 53.1% during FY2011 (accounting for
22.0% of its total revenue compared to 18.0% in FY2010) due to higher usage rates in terms
of minutes of traffic and data transmission—data transmitted over its network averaged
163 terabytes per day in FY2011 compared to 85 terabytes in FY2010. Mobily dominates
the mobile broadband market with a staggering 75.7% share in FY2011. The company’s
dominance in the mobile data segment can be ascribed to its focused strategy. In contrast
to STC, Mobily does not focus on international expansion. This is primarily because it lacks
the scale of operations that STC has, and operates as an international subsidiary of Etisalat
of UAE (hence, its expansion strategy is decided by the parent company). Mobily’s strategy
centers on strengthening its position in the domestic market by expanding presence in the
fast growing data segment, especially mobile broadband. Another important aspect of the
company’s strategy is that it concentrates on customer management, which it believes is
its core strength. In line with this, the company has outsourced network operations and
many distribution and support functions.

Atheeb,
10%

Figure 25: STC dominates fixed broadband

Source: Company filings, Tadawul, AlJazira Capital

STC, 90%

Combined
STC & Zain
KSA,
24.3%
Figure 26: Mobily leads in mobile broadband
Source: Company filings, Tadawul, AlJazira Capital

Mobily,
75.70%

We believe most telecom operators in KSA would focus on fast growing data segment,
considering that the market is underpenetrated and consumers are becoming more tech
savvy. While Mobily is likely to face tough competition from Zain KSA and STC in the
wireless data segment, it would continue to dominate the market. Our belief is based on
the company’s ability to offer WiMax in the area where coverage is still weak. In our opinion,
Mobily should be able to offer a diverse range of data services at higher speeds as it
continues to invest in direct fiber-optic connections to companies. We expect revenue from
the data segment to contribute 25.0% to Mobily’s total revenues by 2014.
As huge capital expenditure on upgrading the technological infrastructure and expanding
in international markets becomes imperative to stay ahead in the race, it is important for
telecom operators to manage cash flows and liquidity prudently. Companies with a healthy
balance sheet, access to funding and targeted growth strategy are expected to gain a
competitive edge, in our view. In the following section, we have assessed STC, Mobily and
Zain KSA in terms of their balance sheet strength, and how they are placed against each
other.
MAY
2012

STC and Mobily better placed to fund growth

Our assessment of the balance sheet strength and liquidity positions of Saudi telecom
operators (STC, Mobily and Zain KSA) suggests that STC and Mobily have strong balance
sheets to fund growth. Though STC has the second largest debt level among our selected
universe of telecom operators2 in the Middle East and North Africa (MENA) region, at 0.56x,
the company’s debt to equity ratio (D/E) is lower than the MENA telecom average of 0.68x.
STC’s net debt to trailing twelve months (ttm) EBITDA after capex, an important measure of
liquidity for telecom operators, declined from 5.93x in FY2008 to 1.70x in FY2011. Net debt
to EBITDA also fell to 1.08x from 1.18x during this period. STC’s debt profile is in line with
its scale of operation—the company has the largest revenue and EBITDA among telecom
operators in the MENA region.
However, considering STC’s massive overseas expansion strategy, we believe its capital
structure would tilt towards borrowings at subsidiaries level. On the other hand, given
the uncertainty and competition in its international markets, STC may not immediately
derive value from operations here. Focus on international markets exposes the company
to a more volatile capital structure and liquidity risks due to increased financial obligation.
However, we are optimistic about STC’s ability to generate sufficient operating cash flows,
given its strong position in the domestic market. Furthermore, in light of its healthy balance
sheet, we are confident the company would be able to tap the debt market and secure
funding, if required.

14,000 350.0%
12,000 300.0%
10,000 250.0%
USD (mn)

8,000 200.0%
6,000 150.0%
Figure 27: STC and Mobily has low D/E ratio 4,000 100.0%
Source: Company filings, AlJazira Capital 2,000 50.0%
0 0.0%

MTSS
MTN
QTEL
STC

DU
Mobily
Zain KSA
Zain
Etisalat

Vodaf. Qatar
Wataniya

Total debt (LHS) D/E (RHS)

7,000 16.00
6,000 14.00
12.00
5,000 10.00
USD (mn)

4,000 8.00
3,000 6.00
Figure 28: Declining net debt/EBITDA 2,000 4.00
2.00
Source: Company filings, AlJazira Capital 1,000 0.00
0 -2.00
MTSS
MTN
QTEL
STC

DU
Mobily
Zain KSA
Zain
Etisalat

TTM EBITDA (LHS) Net Debt/EBITDA

Mobily has a much stronger balance sheet than STC and Zain KSA. Higher EBITDA and
lower debt pushed the net debt/EBITDA after capex to 1.43x in FY2011 from 8.9x in
FY2008. This is favorable relative to 1.70x for STC and 65.83x for Zain KSA. At 0.38x, the
company has one of the lowest D/E ratios among MENA operators. Furthermore, Mobily’s
growth strategy, which centers on consolidating the company’s position in the high growth
region, reduces the risk of overleveraging the balance sheet and volatility in the capital
structure. With healthy finances, Mobily is well poised to continue investing in growth.

2. Please refer appendix for our universe of MENA telecom operators

MAY
2012

Capital restructuring, the top priority for Zain KSA

Zain KSA is struggling to get its finances in order. The company’s D/E ratio was as high as
3.04x during FY2011. High finance charges are eroding Zain KSA’s profits—accumulated
losses reached 69.0% of its paid-up capital. The company is facing a severe liquidity
crunch with approximately SAR9.75 bn of Murabaha facility maturing in July 2012.
Hence, capital restructuring has become a top priority for Zain KSA for the near term. The
company has chalked out a two-stage restructuring plan. In the first stage, Zain KSA plans
to reduce its capital by cancelling 66% of issued capital. In our opinion, this would help
it to erase accumulated losses that totaled SAR9.66 bn as of FY2011. Capital reduction
would increase the stock’s implied market price. This would help it to raise capital, as the
Saudi Capital Markets Law does not permit fresh issue of shares at a discount. We expect
restructuring to conclude before the Murabaha facility matures in July 2012. However, the
company faces the risk of being delisted as according to the Capital Markets Authority
(CMA), a company could be delisted if its accumulated losses reach 75.0% of its paid-up
capital. We believe this could severely cripple Zain KSA’s ability to raise finances and fund
its growth plan.
MAY
2012

Managing costs efficiently holds significant importance

Falling ARPU, rising costs exert pressure on profitability; STC impacted the most
Over the last few years, a constant decline in ARPU levels has been one of the key trends with
regard to telecom operators worldwide. Among our universe of sample countries, ARPU for
most declined at a compounded annual rate of 2.0–8.0% during 2005–10. Among mature
markets, Germany and Italy’s ARPU declined the most (i.e., at a compounded annual rate
of -7.8% and -6.7%, respectively) during 2005-10. Blended ARPU in Saudi Arabia also fell
at a compounded annual rate of 14.8% during the same period to USD20.8 (SAR78.0). The
significant pace of decline in ARPU levels in the Kingdom can be ascribed to the fact that
the sector was liberalized only in 2005, eventually breaking STC’s monopoly.

60.0

50.0

Figure 29: Declining ARPU levels in 40.0

ARPU USD/month

KSA and select developed countries 30.0

Source: Federal Communication Commission, IBM 20.0

Teleco 2015 “five telling years” report, AlJazira Capital
10.0

0.0
2004 2005 2006 2007 2008 2009 2010

France Germany Italy Spain UK US KSA

Telecom operators are aggressively reducing tariffs and offering bundled services at
reduced prices in light of the commoditization of the mobile voice market and stiffer
competition in the domestic market. For instance, STC launched “InVision”, a triple play
marketing strategy, which offers telephony, broadband internet and TV/video-on-demand
services in one package to the consumer. The bundled service would help to reduce the
churn rate as it would be inconvenient for consumers to shift all three services from one
provider to another. In addition to innovative services, operators are increasingly offering
discounts on new data packages. For instance, Mobily offers a 50.0% discount on 1GB
and 5GB data plan “Connect” upon renewal. Mobily also launched “e life”, a new data plan
offering 200Mbps speed, to compete with STC’s “FTTH” plan.
The decline in ARPU levels during the last five years can be ascribed to the reduction in
tariffs and offering of services at discounted prices. During FY2006–11, STC’s blended
ARPU fell 47.3% to SAR72.0, while that of Mobily tumbled 44.8% SAR65.0. On the other
hand, increased focus by operators on capturing market share and upgrading network
during the period led to a spike in expenses. Declining ARPUs and increased expenses
have dented profitability of Saudi Arabia’s telecom operators.
MAY
2012

Figure 30: Current KSA mobile broadband tariffs, discounts and offerings

STC’s “QUICKnet” plan

Old plan Revised plan

Plan Price (SAR/month) Plan Price (SAR/month)

1GB 100 5GB 99

5GB 200 10GB 199

Unlimited 350 Unlimited 350

Mobily’s “Connect” plan

Old plan Revised plan
Plan Price (SAR/month) Plan Price (SAR/month)

1GB 100 2GB 60

5GB 200 5GB 100

Unlimited 350 Unlimited 350

Zain Broadband
Old plan Revised plan
Plan Price (SAR/month) Plan Price (SAR/month)

2GB 60 2GB 30

5GB 100 5GB 60

10GB 200 10GB 100

Unlimited 350 Unlimited 200

Source: Company websites

MAY
2012

ARPU to exhibit downtrend in near to medium term

Despite a significant fall in ARPU levels during the last five years, mobile pricing in Saudi
Arabia has remained high vis-à-vis the standards in developing markets. For instance,
ARPU levels in China stands at around USD9.6, while it is just USD2.2 in India. However,
blended ARPU in Saudi Arabia (at SAR78 or USD20.6) is not high compared to the standards
in developed countries and other GCC nations. At USD33–54, blended ARPU in various
GCC and developed countries such as France, Spain and the UK is substantially higher
than that in Saudi Arabia. Higher level of ARPU in GCC and developed countries partially
reflect the high GDP per capita of these countries.

300.0 200.0
180.3
250.0
140.6 150.0
200.0
114.9
Figure 31: Significant decline in blended 150.0 98.4 80.8 100.0
77.3
ARPU 100.0
50.0
Source: CITC, AlJazira Capital 50.0
0.0 0.0
2005 2006 2007 2008 2009 2010
Prepaid ARPU (LHS) (SAR)
Post Paid ARPU (LHS) (SAR)
Blended ARPU (RHS) (SAR)

25.0
20.6
20.0
ARPU USD/month

13.9
Figure 32: ARPU Still high Vs. emerging 15.0 12.1
9.3 9.6 9.8
mkts. 10.0
Source: IBM Teleco 2015 “five telling years” report, 5.0 2.2
AlJazira Capital
0.0
Africa
China
India

Emerging
Arabia
South

Brazil
Russia

mkt. avg.
Saudi

We have analyzed the relationship between ARPU levels and GDP per capita in select
developed and developing countries as part of our effort to determine the ARPU levels in
Saudi Arabia, going forward. We observed that ARPU/GDP per capita ratio in emerging
markets ranges from 1.08% for Russia to 2.63% for China. As for developed markets, the
ARPU/GDP per capita ratio ranges between 0.63% for Germany and 1.35% for France
within our universe of selected countries. Based on ARPU levels for 2010, Saudi Arabia’s
ARPU/GDP per capita ratio stands at 1.52%, above Qatar, the UAE, Oman and other
developed countries in our universe. We believe this indicates further scope for a fall in
ARPU levels, albeit moderately, in Saudi Arabia. We expect ARPU/GDP per capita ratio for
the Kingdom to be at 0.90–1.10% over the next five years, in line with markets such as Italy
and Spain. Italy and Spain are currently at the lower end of the developed European market
with ARPU and income levels lower than other developed European countries.
MAY
2012

Figure 33: ARPU/GDP per capita for Saudi Arabia to decline

60.0

Emerging markets
50.0 US
Developed
markets France
40.0 Spain
UK
ARPU/month (USD)

UAE Qatar
30.0 Europe
Saudi Arabia

20.0 Oman Italy

S.Africa Brazil Germany

10.0 China
Russia
India
0.0
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
GDP per capita (USD)

Source: CITC, Federal Communication Commission, IBM Teleco 2015 “five telling years” report, AlJazira Capital

We believe blended ARPU in Saudi Arabia would continue its downtrend during our
forecast period (2012–14) due to growth in the subscriber base and price reduction amid
aggressive competition. However, growth in demand for mobile broadband services would
help operators control the fall in ARPU. Consequently, the rate of decline in ARPU in
Saudi Arabia is likely to slowdown to 2.0–2.5% over the next three years from more than
15.0% during 2005–10. We expect blended ARPU in Saudi Arabia at SAR73.8 in 2012,
and a further decline to SAR70.8 by 2014. With regard to operators, impact of the fall in
ARPU levels would be limited for Mobily vis-à-vis STC and Zain. This is primarily due to
Mobily’s strong presence in the mobile broadband segment. The company is also actively
focusing on converting prepaid customers to postpaid accounts, which have greater value.
However, STC would stay ahead of its peers in terms of ARPU levels given its diversified
and bundled service offerings.

75.0 0.0%
73.8
74.0
- 0.5%
73.0 72.3
72.0
70.8 - 1.0%
71.0

Figure 34: ARPU to remain under 70.0 69.4 - 1.5%

69.0 68.4
pressure (2012F-16F) 68.0
- 2.0%

67.0
Source: AlJazira Capital - 2.5%
66.0
65.0 - 3.0%
2012F 2013F 2014F 2015F 2016F

ARPU (SAR) % growth

MAY
2012

Cutting on variable costs is vital

As discussed earlier, declining ARPUs and rising cost pressure have impacted profitability
of Saudi Arabia’s telecom operators. Our analysis suggests that STC has been impacted
the most. This can be evinced from the fact that STC’s EBITDA margins contracted to
36.0% in FY2011 from 48.8% in FY2006. Operating margins also tumbled to 20.1% from
37.4% during the same period. On the other hand, Mobily’s EBITDA margin expanded to
37.2% in FY2011 from 34.3% in FY2006. Although the decline in ARPU levels for both
STC and Mobily is comparable (STC‘s 47.3% Vs. Mobily’s 44.8%) during the last five
years, Mobily’s operating performance has been better vis-à-vis STC. This can largely
be ascribed to Mobily’s focused cost strategy aimed at reducing variable costs. While
Mobily’s expenses related to selling and promotion, as a percentage of sales, declined 70
basis points (bps), STC’s selling and marketing expenses grew 510 bps during FY2006–10.
Furthermore, STC’s international operation dragged down overall profitability due to higher
initial set up cost. Thus, effective cost management has placed Mobily ahead of its peers.

50.0%
45.0%
40.0%
Figure 35: STC—Margins under pressure 35.0%
Source: Company filings, AlJazira Capitall 30.0%
25.0%
20.0%
2006 2007 2008 2009 2010 2011

STC EBITDA margin Mobily EBITDA margin

40.0%
35.0%
30.0%
25.0%
Figure 36: Net margin under pressure as well 20.0%
Source Company filings, AlJazira Capital 15.0%
10.0%
5.0%
2006 2007 2008 2009 2010 2011

STC EBITDA margin Mobily EBITDA margin

It is difficult to control fixed cost in an environment wherein operators plan to upgrade

technological infrastructure with investment in 4G network. Hence, managing variable
costs to maintain profitability would continue to be the key strategy for Saudi Arabia’s
telecom operators. Mobily plans to control variable costs through initiatives such as sharing
infrastructure with existing operators, optimizing spectrum utilization and technology
optimization. STC has also been focusing on achieving overall efficiency through a cost
optimization program. The company outsourced its call center and formed a joint venture
with Aegis to reduce workforce by around 20%. Subsequently, STC entered into talks with
Mobily to share infrastructure to moderate the CAPEX program in its domestic market. The
company has also undertaken employee reduction measures such as the early retirement
program, which is expected to gain traction in the short to medium term. Additionally, STC
can realize synergies in areas such as product development. For instance, the company’s
latest “Xband Jood Premium” bundle catering to the whole household needs for SAR 346/
month has garnered significant momentum in KSA.
MAY
2012

Saudi Arabia Telecom Sector Evolution

• Privatization of STC; established as

Sector was regulated by a joint stock company
Ministry of Post, Telegraph • Introduction of DSL services by STC
and Telephone (MoPTT) • Establishment of the
Telecoms commission
was established Communications and Inf ormation
Technology Commission (CITC)
• STC was established
•Primary body responsible
f or the telecoms sector in
KSA

Prior to 1998 1998 2001 2003 2004

•STC’s monopoly was broken new

license was awarded to Etisalat
•Start of new era with increased
competition and rising
subscribers

2005 2007 2008 2009 2010/11

Saudi Zain starts License to

operation Etihad Atheeb •Launch of IPTV and triple
•Launch of services by play by operators
Etisalat under brand name (Atheeb), the
main •STC launched f astest
Mobily •Issuance of 3 f ixed Internet package in the
• Subscriber base cross 10 licenses shareholder
being Batelco of MENA region (speed:
mn •STC acquires stake in 100Mbps)
•Launch of 3G and 3.5G Maxis and its operation Bahrain
mobile technology by STC in India, Indonesia

History of Saudi Arabia’s telecom sector

The Kingdom’s telecom sector has transformed from a state-owned monopoly to a highly
competitive market over the last decade. This can be primarily ascribed to the government’s
efforts to promote liberalization and competition in the sector.

Pre-1998 period—A period of stagnation

• The sector was highly regulated and administered by MoPTT
• It attracted limited investment due to the government’s interference and limited budget
• STC was formed as a primary entity responsible for the sector’s development
1999-2005 period—Stepping stone was laid for growth
• The Telecom Commission was established in 2001 to regulate the sector
• Saudi Telecom became public through an IPO in 2002
• STC introduced DSL services in 2003
• CITC was established in 2003 to replace the Telecom Commission in order to regulate
the sector, promote investment and safeguard consumer interest through healthy
competition
• STC’s monopoly was broken with the issuance of license to UAE-based Etisalat in
2004. This marked the beginning of a new era for the Saudi Arabian telecom sector
• Etisalat launched commercial services under the brand name Mobily
• STC launched 3G and 3.5G mobile technology for the first time in the Kingdom in 2005
• Subscriber base crossed the 10 mn mark in 2005

2006-2011 period—Sector on an upward curve

• Issuance of three fixed licenses in 2007 is likely to increase competition and promote
investment in the sector.
• Saudi Arabian operators went global—STC acquired a stake in Maxis and its operation
in India and Indonesia in 2007.
• Saudi Zain commenced commercial operation.
• License was issued to Etihad Atheeb (Atheeb), in which Bahrain-based Batelco is the
main shareholder.
• Operators increased their focus on the data segment with the launch of IPTV and triple
play. STC launched the fastest broadband internet package (speed 100Mbps) in the
MENA region.
MAY
2012

Regulations in Saudi Arabia’s telecom sector

As discussed earlier, MoPTT regulated the telecom sector in Saudi Arabia until 1998.
The sector was characterized by monopoly of the government-owned STC and lack
of investment. However, with the establishment of CITC in 2003, the sector witnessed
liberalization. Competition in the sector started to intensify after Etihad Etisalat launched
a service under the brand name Mobily in 2004. Additional mobile licenses and three
fixed licenses were issued in 2007, attracting investment to the sector. Despite increased
liberalization efforts, CITC continues to guard the Kingdom’s telecom sector. CITC plays
an active role in the sector’s development by providing a transparent and just regulatory
environment, promoting fair competition, and attracting new technologies in the ICT sector
to provide end-users with the latest and most reliable services.

CITC Roles and Responsibilities:

• Implement ICT sector policies, plans, and programs
• Issue licenses for ICT provisioning
• Liberalize and regulate the telecommunications market, while attracting local and
international investments in the sector
• Protect consumer interest, rights, and ensure safety and security within the ICT
environment
• Encourage reliance on market forces and promote healthy competition
• Establish the basis for telecom services tariff regulation
• Manage the radio frequency spectrum resource, including development of the National
Frequency Plan, and propose a spectrum usage fee structure
• Promote IT services, increase awareness and usage of the internet
• Encourage research & development in the ICT sector, and encourage modernization of
networks and services
• Establish and manage the National Numbering Plan
MAY
2012

Key Investment Risks

Stiff competition to continue exerting pressure on ARPU

ARPU would continue to fall due to the saturating voice market and intense competition.
This would exert pressure on the top line. However, the rate of decline is expected to
slowdown to 2–2.5% during 2012–14 from over 15.0% during 2005–10. We believe STC
would remain ahead of its peers in terms of ARPU levels given its diversified offerings and
bundled services. As indicated earlier, at the operator level, impact of the fall in ARPU
levels would be limited for Mobily compared to STC and Zain as its strong presence in the
mobile broadband segment would help offset a decline in voice ARPU.

Competition effect to services quality

As competition heats up between Saudi Arabia’s largest two operators, STS and Mobily,
both companies will head to gain more subscriber base in a manner that may add pressures
to technical and administrative capacities of both companies, which will affect the quality
of services provided. In this context, the degradation of services on the short and medium
terms, will provide the opportunity for virtual operators to easily enter the communication
market with advanced services and better response rate to customer complaints compared
to existing operators.

Liquidity risk
Over the last five years, there has have seen significant surge in variable costs of telecom
operators in Saudi Arabia due to a rise in expenses such as selling and general expenses.
Furthermore, with operators increasingly looking to invest in new technologies, managing
working capital and liquidity requirements efficiently poses a significant challenge.

Economic and geopolitical risk

Although the Kingdom is one among the most resilient economies, it is exposed to the
risk of the ongoing global slowdown. Furthermore, despite the initiatives taken by the
government to diversify the economy, Saudi Arabia remains highly dependent on oil, which
accounts for over 80% of the government’s revenues. Although the Kingdom has a strong
diversification plan, development has been focused on the hydrocarbon sector and related
industries, so far. This coupled with the persistent weak social infrastructure has rendered
the benefits of diversification somewhat ineffective. Despite the global economy showing
signs of recovery and oil prices rebounding to over USD100 per barrel, the Kingdom’s
economy continues to face several external risks. Any fresh fall in oil prices could severely
dent business and market sentiment, derailing potential economic recovery.
Saudi Arabia’s economy is also exposed to elevated geopolitical risk in the MENA region.
The ripple effects of the Arab Spring have spread in varying degrees to oil exporting
countries in the region. This coupled with increasing threat from Iran could potentially
reduce business and weigh on investor sentiment.
MAY
2012

Valuation analysis

The Saudi telecom sector currently trades at relatively lower valuation multiples compared
to emerging markets and other nations across the globe. The price to earnings (P/E) multiple
of Saudi telecom companies currently averages 9.7x compared to 12.5x in UAE, 11.4x in
Qatar, 23.5x in India, 23.9x in Brazil, 19.5x in Malaysia and 12.2x in South Africa. The P/E
multiple of Saudi telecom companies is also higher than the 12.3x average of the top five
global players (AT&T, Vodafone Group, Telefonica, Verizon, and France Telecom). The EV/
EBITDA multiple of Saudi telecom companies averaged 5.1x compared to 5.9x for UAE, 5.2x
for Brazil, 9.3x for India, 8.3x for Malaysia, 5.5x for South Africa and 6.3x for global peers.

Figure 37: Comparable valuation analysis

EV/ EV/ EBITDA Subscribers Dividend
P/E(x)
EBITDA (x) Subscribers margin (%) (mn) yield (%)
Saudi Arabia
Saudi Telecom Company 10.4 4.8 1,144 36.0 25.2 5.5
Etihad Etisalat (Mobily) 9.1 5.4 642 37.2 21.5 6.1
ZAIN Saudi Arabia N/A 22.3 749 13.4 9.4 N/A
Average 9.7 5.1* 36.6* 5.8
UAE
ETISALAT 12.0 7.3 2,426 30.5 7.7 8.0
Emirates Integrated 13.0 4.6 739 32.1 5.2 5.0
Average 12.5 5.9 31.3 6.5
Kuwait
Mobile Tele. Co (Zain) 10.2 6.4 291 44.5 40.3 9.4
National Mobile Teleco 3.1 4.1 248 36.6 17.8 2.3
Bahrain
Bahrain Telecom 8.0 3.9 130 38.5 11.0 9.1
Average 8.0 3.9 38.5 9.1
Oman
Oman Telecom. 8.7 4.5 1,316 44.8 1.8 7.8
Nawras 8.3 4.6 536 49.6 2.0 6.3
Qatar
Qatar Telecom 11.4 4.7 240 45.8 83.0 1.8
Vodafone Qatar N/A N/A 2,593 N/M 0.8 N/A
Average 11.4 4.7 45.8* 1.8
Brazil
Tele Norte 20.3 4.5 531 34.9 39.3 4.0
Telemar 41.3 4.7 292 30.9 69.7 2.0
Telef Brazil 10.1 5.9 404 35.6 86.9 3.2
TIM Participações S.A. 21.2 5.3 136 27.1 114.7 1.9
Embratel 26.8 5.4 N/A 25.8 N/A N/A
Average 23.9 5.2 30.9 2.8
India
Bharti Airtel 20.7 9.9 111 33.8 243.3 0.3
Idea Cellular 36.7 8.8 139 24.3 63.8 0.0
Reliance comm. 13.1 6.8 70 37.3 150.0 0.6
Tata comm N/A 11.7 43 10.4 69.2 0.9
MTNL N/A N/A 367 N/M 5.4 N/A
Average 23.5 9.3 31.8* 0.4
Malaysia
Maxis BHD 18.1 N/A 1,184 49.5 14.0 6.6
Axiata Group 19.6 N/A 84 54.0 199.1 3.6
Digi.com BHD 24.2 10.8 1,112 46.4 8.8 4.5
Telekom Malaysia 16.1 5.8 N/A 36.9 3.6
Average 19.5 8.3 46.7 4.6
South Africa
MTN Group Ld. 12.1 5.0 214 41.4 141.6 5.8
Vodacom Group 15.8 6.0 407 33.6 52.9 3.4
Telekom SA Ltd. 8.6 N/A 4,522 27.4 0.5 6.3
Average 12.2 5.5 34.1 5.1
Global
AT & T 14.5 7.9 2,412 24.1 103.2 5.7
Vodafone Group 12.3 6.2 489 32.0 370.9 5.3
Telefonica 9.9 6.2 648 32.2 238.7 N/A
Verizon 17.8 7.0 1,840 26.5 108.7 5.1
France Telecom 7.2 4.3 469 33.2 167.4 13.2
Average 12.3 6.3 29.6 7.3
Source: Bloomberg, AlJazira Capital, Respective company filings, Note-*Excluding Outliers
MAY
2012

The lower P/E and EV/EBITDA multiple of Saudi telecom companies can be ascribed
primarily to their limited exposure to international markets, especially to high-growth
emerging markets. Despite the higher EBITDA margins and dividend yield of Saudi telecom
players, investors are placing high premium on emerging market counterparts due to their
ability to diversify risk and the fact that they operate in high growth markets.

45 .0
40 .0
35 .0
Emerging markets
30 .0 Telecom operators
MENA Telecom Global Telecom

P/E (X)
25 .0 operators
Figure 37: P/E Valuation of telecom players
operators
20 .0
15 .0
10 .0
Source: Bloomberg, AlJazira Capital 5.0
0.0

STC
Mobily

Zain Kuwait
NMTC
Batelco
Oman Telecom.
Nawras
Qatar Telecom
Tele Norte
Telemar
Telef Brazil

Embratel
Bharti Airtel
Idea Cellular
Reliance comm.
Maxis BHD
Axiata Group
Digi.com BHD
Telekom Malaysia

Vodacom Group
Telekom SA Ltd.

Vodafone Group
Telefonica
Verizon
France Telecom
ETISALAT

AT & T
TIM

MTN Group
Emirates

Companies that look attractive

At this point in time, we are bullish on two telecom companies: Saudi Telecom Company
(STC) and Etihad Etisalat (Mobily).
• We initiate coverage on STC with a target price of SAR55.7, representing a potential
upside of 31.4% from the current price. The company is well-placed to maintain
its dominant position, primarily due to its strong presence in the fast-growing fixed
broadband and enterprise segments. International expansion in high-growth markets
also provides potential to unlock value in the long term.
• We initiate coverage on Mobily with a target price of SAR87.4; this implies an upside
potential of 28.1% at current levels. The company is strategically positioned to benefit
from the fast-growing data segment. Its advantage in the mobile broadband segment
and focus on achieving operational efficiency through cost minimization are key
positives.
Note: Our target price is based on the Discounted Cash Flow (DCF) methodology and
comparable valuation. In the DCF models, the income statement, balance sheet and cash
flow statements have been forecasted until 2015. Cash flows are then discounted using
WACC in order to arrive at the target price.
MAY
2012

Saudi Telecom Company

Established in 1998 as a government-owned entity, Saudi Telecom Company (STC)

is the largest telecom operator in Saudi Arabia in terms of revenue as well as mobile
subscribers. The integrated telecom service provider offers services such as fixed-
line telecommunications, leased circuits, telex and telegraph, internet access, mobile
telecommunications and website hosting. STC entered the international market with the
acquisition of a stake in Malaysia’s Maxis Telecom. The company had operations in 11
countries as of 2011 and a combined subscriber base of over 160 mn.

Stock Details Stock Performance

120
Rating: Overweight TASI STC
Current Price (SAR) 42.4 110

Target Price (SAR) 55.7 100

Upside (%) 31.4
90
52 week H/L (SAR) 43.1/33.0
Shares Out. (mn) 2,000 80

Market Cap. (SAR mn) 84,200

Dec -11
Sep -11
Apr -11

Apr -12
Aug -11

Nov -11

Feb -12
May -11

Mar -12
Jan-12
Oct-11
Jun -11
Jul-11
Investment Summary
• STC dominates the Saudi telecom market, accounting for 59.0% of the industry’s
total revenues during FY2011. In terms of mobile subscribers, STC has 45.0% market
share. However, the company’s domestic revenue grew at a CAGR of just 2.8%
during FY2005-11 due to intense competition.
• STC leverages its position as a primary provider of fixed line services to gain advantage
in the fixed broadband segment. The company’s unique selling point is its ability to
deliver superior internet download speeds through fixed lines and offer attractive
bundled packages.
• STC has invested heavily to expand its presence beyond the domestic market. Share
of revenue from the international segment increased from 28.8% in FY2009 to 32.7%
in FY2011. However, its contribution to the bottom line is negligible due to high initial
cost of setting up operations. The company would need to expand the bottom line to
extract value from international operations.
• We arrived at a 12-month target price of SAR55.7 for STC, representing a potential
upside of 31.4% from current levels.

Shareholding Pattern Financial Performance

• During FY2011, revenue increased 7.5% YoY to SAR55.7
GOSI bn. The top-line was primarily driven by a surge in data
PIF 7% revenue, which increased 31.5% YoY to SAR9.4 bn.
Revenue from the international segment also increased
70% Public PPA 10% YoY to SAR18.2bn.
16% 7% • Despite top-line growth, the net income declined 18.1%
YoY to SAR7.7 bn, as service costs grew 13.4% YoY
Source: Zawya, AlJazira Capital, during FY2011.
PIF- Public Investment Fund, GOSI- General
Organization for Social Insurance, PPA- Public
• We expect STC’s net profit to increase 14.4% YoY
Pension Agency in FY2012, translating into a net margin of 13.5%
compared to 15.0% in FY2012.
QUARTERLY FINANCIALS
Indicator 2011A 1Q 2012A 2Q 2012E 3Q 2012E 4Q 2012E 2012E
Total Revenue 55,662 14,679 14,659 14,838 14,750 58,926
YoY change (%) 7.5% 12.3% 5.6% 5.9% 0.4% 5.9%
EBITDA 20,025 5,374 5,462 5,603 5,570 22,009
YoY change (%) 2.1% 11.6% 7.4% 7.8% 13.1% 9.9%
Net Income 7,729 2,521 1,944 2,196 2,181 8,842
YoY change (%) -18.1% 60.3% -13.8% 40.5% -6.7% 14.4%
EPS (SAR) 3.9 1.3 1.0 1.1 1.1 4.4
Source: Zawya, AlJazira Capital
MAY
2012

Investment Overview
•• Maintains dominant position despite stiff competition: Despite liberalization of the
telecom sector and the resultant entry of new players, such as Mobily and Zain KSA,
Saudi Telecom Company continued to maintain its dominant position. The company
held 45.0% market share in the GSM segment with 25.2 mn subscribers in FY2011. In
terms of revenue, the company dominates the local market with 59.0% market share
in FY2011. While it plays catch up to Mobily in the wireless broadband segment, it
has a strong hold on the fixed broadband segment (2.1 mn subscribers towards the
end of FY2011). Although STC’s dominance will continue to remain under pressure,
factors such as the highest ARPU in the sector and presence across all verticals
provide the company an edge.
•• International business gaining traction; exposed to risk: With the domestic voice
market fast approaching maturity, STC is diversifying operations to sustain the
momentum. The company has already invested USD6.0 bn in international markets
since 2007. As international operations gain momentum, the international segment’s
contribution to revenue increased from 28.8% in FY2009 to 32.7% in FY2011.
Expansion in international markets would help STC to diversify its asset portfolio and
create a hedge against saturation in the domestic market. STC plans to increase the
share of revenue from foreign markets to 50.0% by FY2014.
STC would need to incur substantial capital expenditure (not to mention a solid
commitment from the management team) to meet its target of generating 50.0% of
total revenue from the international segment by FY2014. In our opinion, this target is
highly unrealistic. At best, we expect the international segment to contribute 32.3% of
total revenue by FY2014. The international segment’s contribution to the bottom line
is negligible due to the high initial cost of setting up operations and capex. Although
operations in Malaysia, Turkey and South Africa have already started generating
returns, countries such as India and Indonesia would require significant investments.
International operations do carry a high upside potential in the long term; however,
scaling up contribution to the bottom line would be a challenge for STC.
•• Robust network provides edge in fixed broadband market: STC enjoys a superior
position in the DSL business due primarily to its robust network (more than 150,000
km of fiber cable line is already operational). This has enabled STC to provide superior
internet download speeds through fixed lines, thereby strengthening its position in
the fixed broadband segment. In our opinion, STC’s focus on implementing cutting-
edge technologies, such as FTTH, will continue to give the company a competitive
advantage in the fixed line broadband segment. We expect STC’s fixed broadband
subscriber base to increase at a CAGR of 10.4% during FY2011-15 and reach 3.12
mn by the end of 2015. This is expected to contribute significantly to the company’s
top-line growth.
•• Competitively positioned in high-growth Enterprise segment: The Enterprise
segment is quickly emerging as a new area of focus for Saudi telecom operators.
The Kingdom’s robust macroeconomic fundamentals and stable growth outlook are
likely to spur the establishment of new businesses. STC is competitively positioned
in the fast-growing Enterprise segment due to its experience in catering to big-
ticket corporate clients. Besides, the company has the ability to offer fully integrated
offerings, a critical factor for success as enterprises increasingly look for one-stop
solutions. We believe STC’s strong position in the rapidly growing Enterprise segment
should help the company consolidate revenue in the domestic market.
•• Valuation: We used the blended valuation approach based on DCF and comparative
methods to value STC. Based on this, we arrived at a 12-month target price of SAR55.7
for the company’s stock, implying a potential upside of 31.4% from current levels.
MAY
2012

Risk Factors

• The ripple effects of the Arab Spring coupled with increasing threat from Iran could
potentially reduce business and weigh on investor sentiment.
• With ever increasing competition, we expect STC’s voice ARPU to fall by an
average 1.0% until FY2014. However, ARPU may decline further as players wage an
aggressive battle for market share based on pricing.

SWOT Analysis

STRENGTH
• Largest telecom service provider in
Saudi Arabia, despite competition
• Only Saudi player with significant
presence in high growth
international market
• Integrated telecom service provider
with presence across segments
• Strong balance sheet and liquidity
position
OPPORTUNITIES
• Significant opportunity in mobile
broadband and enterprise segments
• International markets, such as
Malaysia, Turkey and India, hold
potential
WEAKNESS
• Limited presence in fast-growing
mobile broadband segment—
playing catch up to Mobily
• Dividend yield to decline;
STC may need cash to meet
its aggressive international
expansion target
THREATS
• Entry of new players following
liberalization may dent market
share
• Rapidly evolving technology may
render existing infrastructure
obsolete
MAY
2012

Financial Data
Income Statement (SAR million) 2011A 2012E 2013E 2014E
Total revenue 55,662 58,926 62,074 63,880
Growth YoY (%) 7.5% 5.9% 5.3% 2.9%
Cost of Services (24,334) (24,918) (26,777) (27,647)
Gross Profit 31,328 34,008 35,298 36,233
Selling and marketing exps. (7,424) (7,770) (8,186) (8,368)
General and administrative exps. (3,879) (4,229) (4,345) (4,472)
EBITDA 20,025 22,009 22,767 23,393
Depreciation and amortization (8,854) (8,925) (9,567) (9,824)
Operating profit 11,171 13,083 13,200 13,568
Finance cost (2,238) (2,357) (2,095) (1,789)
Provision for Tax / Zakat (118) (135) (140) (143)
Net Profit 7,729 8,842 9,150 9,357
Balance sheet (SAR mn)
Cash and cash equivalents 6,589 10,906 11,097 6,585
Accounts receivable 8,755 9,653 11,219 12,426
Prepayments and other current assets 4,177 4,776 5,266 5,575
Total current assets 21,967 25,335 27,582 24,586
Property, plant and equipment 55,085 56,295 58,577 61,547
Intangible assets 29,318 29,318 29,318 29,318
Total Assets 111,402 116,167 121,015 121,223
Accounts payable 5,190 3,806 4,020 4,123
Murabahas and loans – current portion 5,972 7,659 7,955 7,542
Total current liabilities 25,263 27,201 28,551 28,547
Murabahas and loans 23,960 21,804 19,978 14,816
Share Capital 20,000 20,000 20,000 20,000
Retained earnings 19,516 24,358 29,507 34,864
Total Equity 54,082 58,738 63,695 68,854
Total Liabilities & Shareholders’ Equity 111,402 116,167 121,015 121,223
Cash Flow Statement (SAR mn)
Cash Flow from Operating Activities 16,488 19,238 17,902 18,205
Cash Flow from Investing Activities (8,264) (10,265) (11,989) (12,945)
Cash Flow from Financing Activities (7,686) (4,655) (5,722) (9,773)
Net Change in Cash 538 4,318 191 (4,512)
Cash at the Start of the Year 6,051 6,589 10,906 11,097
Cash at the End of the Year 6,589 10,906 11,097 6,585
Ratios
P/E (x) 11.0 9.6 9.3 9.1
P/BV (x) 1.6 1.4 1.3 1.2
EV/EBITDA (x) 5.9 5.8 5.2 5.1
Dividend Yield (%) 5.3% 4.7% 4.7% 4.7%
ROaA 7.0% 7.8% 7.7% 7.7%
ROaE 14.4% 15.7% 14.9% 14.1%
Diluted EPS (SAR) 3.9 4.4 4.6 4.7
DPS (SAR) 2.3 2.0 2.0 2.0
MAY
2012

MOBILY

Established in 2004, Etihad Etisalat (Mobily) provides wireless telecommunication services,

mobile voice and broadband, home broadband and business consultancy services. The
company operates primarily in Saudi Arabia and enjoys a strong hold on the mobile
broadband segment. Mobily also generates revenue from the sale of mobile handsets and
smartphones. Mobily is an associate of UAE-based Etisalat, which owns 27.5% stake in
the company.

Stock Details Stock Performance

Rating: Overweight 140 TASI Mobily
130
Current Price (SAR) 68.3
120
Target Price (SAR) 87.4
110
Upside (%) 28.1
100
52 week H/L (SAR) 70.3/49.8
90
Shares Out. (mn) 700
80
Market Cap. (SAR mn) 47,775

Dec - 11
Sep - 11
Apr - 11

Apr - 12
Aug - 11

Nov - 11

Feb - 12
May - 11

Mar - 12
Jan - 12
Oct - 11
Jun- 11
Jul- 11
Investment Summary
• Mobily is a frontrunner in the rapidly growing data segment primarily due to its
strong presence in mobile broadband. The company’s strategy is fully focused on
consolidating its position in the data segment. In our view, Mobily has both delivery
capabilities and the brand image to unlock further potential in this segment.
• Mobily is focusing on achieving operational efficiency by cutting costs. This could
also enhance margins moderately. The company’s strategy of deriving more value
from existing customers by increasing the proportion of postpaid subscribers should
also improve margins.
• We expect Mobily to maintain a dividend payout of 39.5% in FY 2012, given its
healthy free cash flow generation capabilities. This implies a dividend yield of 4.8%
over the current price of SAR68.3.
• We arrived at a 12-month target price of SAR87.4 for Mobily, representing a potential
upside of 28.1% from current levels.

Shareholding Pattern Financial Performance

• During DY2011, Mobily’s revenue grew 25.2% YoY to
SAR20.1 bn as data revenue increased 59.0% YoY. The
Emirates Telecom Public contribution of data revenue to total revenue increased
from 18.0% in FY2010 to 22.0% in FY2011.
27.5% GOSI 61.3% • Mobily’s net income increased 20.7% YoY to SAR5.1
11.2% bn during FY2011. This was supported by strong top-
line growth.
Source: Zawya, AlJazira Capital, GOSI- • We expect Mobily’s net profit to increase 13.2% YoY in
General Organization for Social Insurance
FY2012, translating to a net margin of 26.1% compared
to 25.4% in FY2011.

QUARTERLY FINANCIALS
Indicator 2011A 1Q 2012A 2Q 2012E 3Q 2012E 4Q 2012E 2012E
Total Revenue 20,052 5,009 5,391 5,754 5,924 22,077
YoY change (%) 25.2% 11.7% 5.2% 24.0% 2.1% 10.1%
EBITDA 7,454 1,811 2,048 2,188 2,273 8,319
YoY change (%) 20.9% 14.8% 16.4% 20.7% -1.4% 11.6%
Net Income 5,083 1,207 1,407 1,536 1,605 5,755
YoY change (%) 20.7% 21.0% 20.8% 25.5% -5.4% 13.2%
EPS (SAR) 7.3 1.7 2.0 2.2 2.3 1.7
Source: Zawya, AlJazira Capital
MAY
2012

Investment Overview
•• Data segment holds key: The mobile data segment has grown rapidly over the last
couple of years. Mobily is a clear leader in the Data segment, primarily due to its
strong presence in mobile broadband—revenue from mobile data and value-added
services accounted for approximately 22.0% of the company’s total revenue in
FY2011, higher than the industry average of 15.0%. The segment has tremendous
growth potential, considering the Kingdom’s youth demographic profile and the
(consequent) increasing demand for smart devices. We believe Mobily would continue
to maintain its leadership in the mobile data segment, which, in our view, would be a
key catalyst for top-line growth in the near to medium term. The company has robust
infrastructure, brand image (appealing to youth), focused strategy (weaved around
data segment), and delivery capabilities to maintain its leadership in this high growth
segment.
•• Operational efficiency through cost-control measures: Mobily is increasingly
focusing on improving operational efficiency by managing costs. This would enable
the company to protect margins in a highly competitive environment. Mobily plans to
control variable costs through initiatives such as sharing infrastructure with existing
operators, optimizing spectrum utilization and technology optimization. This coupled
with the company’s strategy of deriving more value from existing customers by
increasing the proportion of postpaid subscribers should support moderate margin
growth. We expect EBITADA margins to increase 70 bps to 38.4% during FY2012-15.
•• Healthy divided yield: Under the new dividend policy introduced in FY2011, Mobily
plans to pay quarterly dividends FY2012 onwards—it currently distributes dividends
semi-annually. In FY2011, Mobily has maintained a high dividend payout ratio of
44.8%, translating into an average dividend yield of 4.9%. We expect the company
to maintain a dividend payout of 39.5% in FY 2012, considering its healthy free cash
flow generation capabilities. This would translate to a dividend yield of 4.8% over the
current price of SAR68.3.
•• Valuation: We have used the blended valuation approach based on the DCF and
comparative methods to value Mobily. Based on this, we arrived at a 12-month target
price of SAR87.4 for the company’s stock, implying a potential upside of 28.1% from
current levels.

Risk Factors

• The ripple effects of the Arab Spring coupled with increasing threat from Iran could
potentially reduce business and weigh on investor sentiment.
• Although Mobily has a strong presence in the wireless segment, it lags STC in the
fixed line segment.
• With ever-increasing competition, we expect Mobily’s voice ARPU to fall by an
average 1.5-2.0% until FY2015. However, ARPU may fall further as players compete
aggressively on pricing.

SWOT Analysis

STRENGTH
• Market leader in fast-growing
mobile data segment
• Strategy focused on wireless
segment, with strong infrastructure
and brand image
• Strong balance sheet and liquidity
OPPORTUNITIES
• Significant opportunity in enterprise
segment
• Opportunity to expand beyond Saudi
Arabia • Rapidly evolving technology may
WEAKNESS
• Lags STC in fixed line segment
• No geographic diversification;
complete focus on Saudi market
THREATS
• Entry of new players following
liberalization could dent market
share
render existing infrastructure
obsolete
MAY
2012

Financial Data
Income Statement (SAR million) 2011A 2012E 2013E 2014E
Total revenue 20,052 22,077 23,963 24,451
Growth YoY (%) 25.2% 10.1% 8.5% 2.0%
Cost of Services (9,728) (10,602) (11,697) (11,752)
Gross Profit 10,324 11,475 12,266 12,699
Selling and marketing exps. (1,086) (1,194) (1,246) (1,247)
General and administrative exps. (1,784) (1,963) (2,085) (2,115)
EBITDA 7,454 8,319 8,935 9,337
Depreciation and amortization (2,149) (2,390) (2,618) (2,746)
Operating profit 5,305 5,929 6,317 6,591
Finance cost (213) (178) (142) (111)
Provision for Tax / Zakat (54) (61) (66) (69)
Net Profit 6,589 10,906 11,097 6,585
Balance sheet (SAR mn)
Cash and cash equivalents 1,690 968 1,977 4,180
Accounts receivable 6,323 6,937 7,529 7,683
Prepaid expenses and other assets 1,399 436 385 386
Total current assets 9,893 10,268 12,010 14,387
Property, plant and equipment 16,412 17,868 18,900 19,745
Total Assets 37,501 38,797 41,036 43,724
Accounts payable 7,808 6,719 5,499 5,231
Current portion of long-term loan 4,895 1,072 1,058 1,388
Total current liabilities 18,046 13,606 12,850 12,935
Long-term debt 977 3,216 2,470 1,388
Share Capital 7,000 7,000 7,000 7,000
Retained earnings 9,810 12,715 15,828 18,863
Total Equity 18,388 21,868 25,600 29,283
Total Liabilities & Shareholders’ Equity 37,501 38,797 41,036 43,723
Cash Flow Statement (SAR mn)
Cash Flow from Operating Activities 6,673 6,448 7,335 8,813
Cash Flow from Investing Activities (3,408) (3,312) (3,115) (3,056)
Cash Flow from Financing Activities (3,237) (3,859) (3,211) (3,553)
Net Change in Cash 28 (722) 1,009 2,204
Cash at the Start of the Year 1,661 1,690 968 1,977
Cash at the End of the Year 1,690 968 1,977 4,180
Ratios
P/E (x) 9.4 8.3 7.7 7.4
P/BV (x) 2.6 2.2 1.9 1.6
EV/EBITDA (x) 8.6 7.1 6.4 5.9
Dividend Yield (%) 4.8% 4.8% 5.1% 5.9%
ROaA 14.3% 15.1% 15.5% 15.3%
ROaE 29.9% 28.6% 26.0% 23.6%
Diluted EPS (SAR) 7.3 8.2 8.8 9.3
DPS (SAR) 3.3 3.3 3.5 4.0
MAY
2012

Appendix 1: Saudi telecom sector— Key metrics

2007A 2008A 2009A 2010A 2011E 2012F 2013F 2014F

Total Subscribers (mn) 28.4 36.0 44.8 51.6 56.1 60.1 62.1 64.0
% Growth 44.4% 26.8% 24.4% 15.2% 8.7% 7.2% 3.3% 3.1%
Prepaid subscribers (mn) 23.6 30.5 38.7 45.3 49.1 52.0 53.4 54.7
Post paid subscribers (mn) 4.8 5.5 6.1 6.3 7.0 8.1 8.7 9.2
Total Penetration % 113.0% 138.0% 167.0% 186.0% 198.0% 207.0% 209.0% 211.0%
Active penetration % 95.0% 114.1% 135.7% 152.1% 165.4% 173.9% 175.4% 177.1%
2G subscribers (mn) - - - 44.4 42.1 37.0 35.1 33.6
% of Total - - - 86.0% 75.0% 61.6% 56.5% 52.5%
3G subscribers (mn) - - - 7.2 14.0 21.0 23.6 25.6
% of Total - - - 14.0% 25.0% 35.0% 38.0% 40.0%
4G subscribers (mn) - - - 0.0 0.0084 2.04 3.41 4.80
% of Total - - - 0.0% 0.02% 3.4% 5.5% 7.5%
Fixed line subscribers (mn) 4.0 4.1 4.2 4.2 4.5 4.5 4.6 4.7
Fixed broadband subscribers 0.62 1.04 1.4400 1.74 2.13 2.8 3.4 3.9
% Growth 181.8% 67.7% 38.5% 20.8% 22.4% 29.8% 21.6% 15.6%
Mobile broadband subscribers* 0.1 0.3 1.3 2.7 3.7 5.0 6.1 7.0
Blended ARPU (SAR) 115.1 98.3 80.4 78.0 75.7 73.8 72.3 70.8
VAS revenue (% of total revenue) 8.4% 10.6% 12.6% 15.0% 17.0% 21.0% 25.0%
Source: AlJazira Capital, CITC, *Standard broadband subscribers
COMPANY PROFILE
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant
Saudi Closed Joint Stock company and operating under the regulatory
supervision of the Capital Market Authority. AlJazira Capital is licensed to
conduct securities business in all securities business as authorized by CMA,
including dealing, managing, arranging, advisory, and custody. AlJazira
Capital is the continuation of a long success story in the Saudi Tadawul
market, having occupied the market leadership position for several years.
With an objective to maintain its market leadership position, AlJazira Capital
is expanding its brokerage capabilities to offer further value-added services,
brokerage across MENA and International markets, as well as offering a full
suite of securities business.
RATING TERMINOLOGY

Overweight: This rating implies that the stock is currently trading at a discount
to its 12 months price target. Stocks rated “Overweight” will typically provide
an upside potential of over 10% from the current price levels over next twelve
months.

Underweight: This rating implies that the stock is currently trading at a

premium to its 12 months price target. Stocks rated “Underweight” would
typically decline by over 10% from the current price levels over next twelve
months.

Neutral: The rating implies that the stock is trading in the proximate range
of its 12 months price target. Stocks rated “Neutral” is expected to stagnate
within +/- 10% range from the current price levels over next twelve months.

Suspension of rating or rating on hold (SR/RH): This basically implies

suspension of a rating pending further analysis of a material change in the
fundamentals of the company.

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