SFC Telecom AR

Rating Summary
Rating
Price
Target
Price
Upside
Saudi
Telecom
(STC)
BUY
39.9
51.1
28.0%
Etihad
Etisalat
(Mobily)
HOLD
74.8
80.6
7.8%
Company
International markets offer long-term growth prospects for STC: International

markets offer long-term growth opportunities and earnings diversification. However, in
view of the ongoing political risks across the Middle East region and recent one-off
hits, investors are likely to attach a discount to diversified telcos like STC. We believe
the Saudi market is relatively well-insulated from various regional risks and domestic
focused Mobily offer a better perceived risk profile vis--vis STC. However, we see
that the attractive growth prospects of STCs international operations, including Kuwait
(top line up ~127% during 20112012) and Bahrain (up ~170% over the same period),
have been overshadowed. Nevertheless, with an estimated ~77% of EBITDA coming
from Saudi Arabia, the 33% discount on EV/EBITDA 2013 on STC relative to Mobily is,
in our opinion, excessive and should narrow in the coming year.
Refer to important terms or use, disclaimers and disclosures on back page.
Valuation Summary 2013e

Dividend
yield
Cash
flow
yield
4.6
5.0%
12.8%
6.9
6.2%
7.3%
Company
P/E
EV/
EBITDA
Saudi
Telecom
(STC)
9.0
Etihad
Etisalat
(Mobily)
9.0
Sources: Company, Saudi Fransi Capital analysis
Telecom stock movement vs TASI
Jul-12
Jan-13
Jan-12
EEC
Jul-11
STC
Jul-10
TASI
Jan-11
220
200
180
160
140
120
100
80
60
40
20
0
Jul-09
EBITDA margins to expand; earnings outlook positive: We forecast broadband to

drive growth for Saudi telcos, with STC expected to leverage on its dominant market
position in the fixed line/FTTH operations (fiber ~10x Mobily), push into mobile
broadband and pricing power while international market growth prospects convert into
EBITDA contribution. Leadership position in mobile broadband space, management
track record and superior ROEs are positives for Mobily. We expect EBITDA margins
for both entities to expand ~120-250 bps to ~38-39% levels. Earnings are projected to
grow at an average 4-7% yoy over the next five years.
Prices as of February 11, 2013; * Not covered
Jan-10
Increasing broadband penetration and data revenue to drive top line: We expect
STC to deliver a top-line CAGR of 3.9% versus Mobilys 5.4% for the period 2012-17e.
Broadband services is the main driver to revenue growth, with segment penetration
(as a % of household) forecast to reach 60% in 2017 compared to an estimated 45%
in 2012. Favorable demography (high percentage of a techsavvy, young population,
~57% under 30y), rising number of internet users, low levels of broadband penetration,
increasing smartphone adoption in the Kingdom coupled with a potentially large
appetite for data intensive entertainment solutions and a push towards e-government
would primarily drive demand in the broadband market. Unlike voice services (where
mobile services substituted fixed line), the emerging trend of data service adoption
through Wi-Fi networks (vis--vis cellular network) is gaining traction across several
developed markets.
Jan-09
BUY STC with TP of SAR 51.1/share, HOLD Mobily: With STC regaining the
domestic market initiative backed by an upgraded fixed broadband infrastructure
capable of bringing interactive entertainment and high-speed data to every Saudi
home and business, much of its capex spend behind coupled with some international
operations turning EBITDA positive STC is undoubtedly our top-pick. We start STC
with BUY recommendation and Target Price (TP) of SAR 51.1 per share implying an
upside of 28%. Our initiation on Mobily is with HOLD recommendation and TP of SAR
80.6 per share, suggesting a moderate upside of 8%. With an EV/EBITDA 2013 of
4.6x 2013, STC is at a 17% discount to the Middle East and Africa (MEA) peers, while
at 6.9x, Mobily is trading at a premium of 24% to MEA peers.
NC*
Jul-07
Zain KSA
Jan-07
We initiate coverage on the Saudi telecom sector with an optimistic outlook. The Kingdoms
telcos have been investing in network upgrades and are, in our opinion, well-placed to tap
emerging broadband and data services opportunities. We see Saudi Telecom Company
(7010/STC AB), which is ahead in the capex cycle, offering a free cash flow yield nearly twice
that of Etihad Etisalat (Mobily) (7020/EEC AB), which is currently making considerable capital
investments. We find STCs valuation most attractive, the risk perception around the shares to
be overdone and the recent weakness in the shares as a lucrative entry point. Mobily, a pure
play on the Saudi market, has recorded strong earnings growth and ROE well above peer
average, however, shares had a phenomenal run and we see them as almost fairly valued at
current levels.
Jul-08
Mobily played out; STC unfolding
Telecom | Equity Research | 12 February 2013
Jan-08
Saudi Arabia Telecom
Source: Bloomberg
Sector Coverage
Roy Cherry
rcherry@fransicapital.com.sa
+966- 1-2826844
Saudi Fransi Capital
STC: Key Forecast

Revenue and EBITDA margin (2012-2017e)
EPS vs Net income margin (2012-2017e)
80
38%
40
36%
30
34%
20
Ebitda margin (%)
60
32%
10
0
30%
6
5
4
4.6
4.9
5.2
20%
18%
3.7
16%
14%
12%
2012 2013e 2014e 2015e 2016e 2017e
Revenue
4.4
5.6
10
22%
9.5
9.6
9.3
25%
20%
15%
10%
5%
10%
EPS
9.4
0%
2012 2013e 2014e 2015e 2016e 2017e
2012 2013e 2014e 2015e 2016e 2017e
Ebitda Margin (%) (RHS)
9.7
8.8
Capex-Sales (%)
40%
50
30%
24%
Capex (in SAR bn)
65.5
Capex vs Capex-Sales (2012-2017e)

12
Net income margin (%)
62.7
59.4 60.7
71.8
EPS (in SAR per share)
Revenue (in SAR bn)
70
68.5
42%
Capex
Net Income Margin (%) (RHS)
Capex-sales (%) (RHS)
Sources: Company reports, Saudi Fransi Capital analysis

Note: Forecast based on existing accounting methodology, EBITDA and net income margins exclude one-offs.
Mobily: Key Forecast

40
EPS vs Net income margin (2012-2017e)
42%
Capex vs Capex-Sales (2012-2017e)
30%
30%
14
30.8
40%
38%
20
36%
15
34%
10
32%
5
0
30%
12
10
7.8
8.8
9.4
28%
27%
26%
25%
24%
23%
2012 2013e 2014e 2015e 2016e 2017e
Revenue
8.3
9.8
10.2
Ebitda Margin (%) (RHS)
22%
2012 2013e 2014e 2015e 2016e 2017e
EPS
Net Income Margin (%)
4.9
4.5
Capex (in SAR bn)
23.6
29.4
Net income margin (%)
25
25.6 26.5
27.9
EPS (in SAR per share)
30
29%
Ebitda margin (%)
Revenue (in SAR bn)
35
4.2
4.5
4.7
4.9
25%
20%
15%
10%
5%
Capex-Sales (%)
Revenue and EBITDA margin (2012-2017e)
0%
2012 2013e 2014e 2015e 2016e 2017e
Capex
Capex-sales (%) (RHS)

Note: 2012 EPS adjusted for 770mn shares
Page 2
Summary financials and ratios STC and Mobily

STC (in SARmn)
2008
2009
2010
2011
2012
2013e
2014e
Revenue
47,469
50,780
51,787
55,662
59,372
60,722
62,659
EBITDA
21,743
20,612
19,621
20,025
20,945
22,191
23,132
Net Profit
11,038
10,863
9,436
7,729
7,351
8,875
9,135
Earnings per share, SAR
5.5
5.4
4.7
3.9
3.7
4.4
4.6
Dividend per share, SAR
3.8
3.0
3.0
2.0
2.0
2.0
2.5
Total Assets
99,762
109,587
110,781
111,402
117,912
127,512
133,970
Total Debt
36,321
36,109
33,697
33,598
34,823
37,526
38,360
Total Equity
42,562
50,833
53,464
54,082
58,969
64,543
69,467
EBITDA margin (%)*
45.8%
40.6%
37.9%
36.0%
35.3%
36.5%
36.9%
Capex/ Sales
34.3%
30.8%
21.9%
14.1%
14.8%
16.0%
15.0%
ROAA (%)
13.3%
10.7%
9.1%
7.1%
7.0%
7.8%
7.5%
ROAE(%)
30.5%
28.0%
23.1%
17.2%
16.3%
17.8%
16.9%
Key Ratio and Valuation
Cash flow yield (%)
6.1%
0.4%
12.3%
10.8%
4.2%
12.8%
14.1%
P/Earnings
6.6
7.2
7.3
10.3
10.9
9.0
8.7
P/Book
2.2
2.1
1.9
1.7
1.6
1.4
1.3
EV/ EBITDA
5.5
5.2
5.7
5.6
5.2
4.6
4.2
P/Sales
2.3
1.7
1.6
1.4
1.3
1.3
1.3
Mobily (in SARmn)
2008
2009
2010
2011
2012
2013e
2014e
Revenue
10,795
13,058
16,013
20,052
23,642
25,553
26,461
EBITDA
3,794
4,837
6,165
7,454
8,591
9,267
9,660
Net Profit
2,092
3,014
4,211
5,083
6,018
6,406
6,797
Earnings per share, SAR
2.7
3.9
5.5
6.6
7.8
8.3
8.8
Dividend per share , SAR
0.7
1.1
1.8
3.0
3.9
4.6
4.9
27,192
30,926
33,430
37,501
38,623
42,617
46,468
Total Assets
Total Debt
9,790
8,595
7,972
7,073
8,258
9,039
9,468
Total Equity
9,754
12,243
15,580
18,388
20,906
23,769
26,808
EBITDA margin (%)
35.1%
37.0%
38.5%
37.2%
36.3%
36.3%
36.5%
Capex/ Sales
27.4%
25.2%
20.5%
18.5%
20.6%
17.5%
16.0%
ROAA (%)
8.9%
10.4%
13.1%
14.3%
15.8%
15.8%
15.3%
ROAE(%)
26.7%
27.4%
30.3%
29.9%
30.6%
28.7%
26.9%
1.0%
1.7%
3.8%
5.2%
3.8%
7.3%
8.6%
27.5
19.1
13.7
11.3
9.6
9.0
8.5
5.9
4.7
3.7
3.1
2.8
2.4
2.1
17.4
13.5
10.4
8.4
7.5
6.9
6.5
5.3
4.4
3.6
2.9
2.4
2.3
2.2
Key Ratio and Valuation
Cash flow yield (%)

P/Earnings
P/Book
EV/ EBITDA
P/Sales
Sources: Bloomberg, Company reports, Saudi Fransi Capital analysis

Note: Per share data for Mobily based on 770mn shares;
* Excluding One-off charges
Historical multiples based on closing prices as of February 11, 2013
Page 3
TABLE OF CONTENTS
Mobily played out; STC unfolding ..................................................................................................................................... 1
Summary financials and ratios STC and Mobily ........................................................................................................... 3
Investment Thesis ............................................................................................................................................................... 6
Mobily mostly played-out, STC still unfolding.................................................................................................................................................. 6
Saudi Arabian Telecom Market ........................................................................................................................................ 13

Mobile revenue accounts for 80% of Saudi market ...................................................................................................................................... 13
Saturated mobile penetration in Saudi Arabia with three operators, STC leading ........................................................................................ 13
Similar prices for mobile services leave little to differentiate on pricing front ................................................................................................ 15
Competitive pricing for iPhones; most players attracting customers through free offers ............................................................................ 16
STCs dominance in fixed line to continue .................................................................................................................................................... 17
Broadband opportunity untapped; attractive growth prospects for data services ......................................................................................... 19
STCs superior pricing power for high-speed FTTH services ....................................................................................................................... 21
Internet usage in Saudi Arabia has substantial room for growth .................................................................................................................. 22
Trend reversal of fixed-mobile substitution could unfold in data service; STC at a competitive advantage ................................................. 25
Intensifying competition; STC enjoys pricing power in FTTH ....................................................................................................................... 26
Margins under pressure; high ARPU data services to drive EBITDA ........................................................................................................... 26
High bad debt provision for STC, potential to improve exists ....................................................................................................................... 27
Potential value creation opportunity through network sharing for both STC and Mobily .............................................................................. 27
STC ahead in capex cycle; opportunity to drive asset returns higher ........................................................................................................... 28
Moderate regulatory risks & stable royalty fees ............................................................................................................................................ 28
Regulatory cost pressure easing, room for margin expansion as data revenue mix increase ...................................................................... 29
Strong balance sheet position; capital return prospects are high ................................................................................................................. 30
STC: Investment Highlights ............................................................................................................................................. 31

Investment Thesis ............................................................................................................................................................. 33
STCs background: Leader among GCC telecoms ....................................................................................................................................... 33
Well established network infrastructure; competitive advantage in fixed broadband .................................................................................... 34
International markets offer long-term growth for STC, but investor concerns exist ...................................................................................... 36
Change in reporting method starting 1Q 2013 .............................................................................................................................................. 40
New international opportunities for STC Morocco, Algeria and Libya ........................................................................................................ 40
Margin outlook positive ................................................................................................................................................................................. 41
Improving core operating environment to drive earnings .............................................................................................................................. 41
Legacy PSTN a drag on STCs returns ......................................................................................................................................................... 43
Capex program mostly behind for STC ......................................................................................................................................................... 44
Strong balance sheet to support dividends ................................................................................................................................................... 44
Our forecast vs. consensus........................................................................................................................................................................... 45
4Q 2012 results: One-off charges impact bottom line ................................................................................................................................... 45
In a worst case scenario, STC could take upto 32% knock on earnings ...................................................................................................... 45
Valuation ............................................................................................................................................................................ 46
Page 4
We arrive at a fair value of SAR 51.1 per share for STC .............................................................................................................................. 46
Mobily: Investment Highlights ......................................................................................................................................... 53

Investment Thesis ............................................................................................................................................................. 55
Mobily establishing itself as market leader from being market challenger .................................................................................................... 55
Solid mobile infrastructure; but behind in fixed broadband ........................................................................................................................... 55
Data services the key margin driver, EBITDA outlook positive ..................................................................................................................... 56
Earnings outlook is positive........................................................................................................................................................................... 57
Management track record and superior ROE are positives for Mobily ......................................................................................................... 58
Mobily to continue its ambitious capex program ........................................................................................................................................... 59
Mobily is a key asset for Etisalat; a case for future stake increase exists ................................................................................................... 60
Mobily expected to continue with the shareholder-friendly policy ................................................................................................................. 60
Our forecast vs. consensus........................................................................................................................................................................... 60
4Q 2012 results: Continuous business momentum ...................................................................................................................................... 61
Valuation ............................................................................................................................................................................ 62
We arrive at a fair value of SAR 80.6 per share for Mobily ........................................................................................................................... 62
Appendix: Telecom sector ............................................................................................................................................... 68

Appendix: Saudi Telecom Company ............................................................................................................................... 70
Appendix: Etihad Etisalat Company (Mobily) ................................................................................................................ 71
Recommendation Framework .......................................................................................................................................... 72
Research & Advisory Department ................................................................................................................................... 73
Disclaimer .......................................................................................................................................................................... 74
Page 5
Investment Thesis
Mixed performance by
Saudi telcos; Mobily
outperforms on strong
fundamentals
Mobily mostly played-out, STC still unfolding

While Etihad Etisalat (Mobily) has outperformed the Tadawul All-Share Index (TASI), Saudi Telecom Company (STC)
has been an obvious long-term under-performer. STCs underperformance was initially warranted based on concerns
about: 1) growing domestic competition, 2) under-performing acquisitions, 3) burden of fixed line network, 4)
perceived lack of agility and innovation compared to newcomers, and 5) exposure to regional countries facing
instability.
STC underperforms market; Mobily a clear outperformer (2007 to February 11, 2013)
220
200
TASI
STC
Mobily
180
160
140
120
100
80
60
40
20
0
Jan-07 Jul-07
Jan-08 Jul-08
Jan-09 Jul-09
Jan-10 Jul-10
Jan-11 Jul-11
Jan-12 Jul-12
Jan-13
Sources: Bloomberg, Saudi Fransi Capital analysis

Today STC has absorbed the initial shock to its business, regrouped and is, in our view, back on the offensive on
multiple fronts. In our opinion, STC is regaining the domestic market initiative backed by an upgraded fixed
broadband infrastructure capable of bringing interactive entertainment and high-speed data to every Saudi home and
business coupled with international operations delivering growth and starting to turn EBITDA positive STC is
undoubtedly our top-pick.
In short, we believe the stock is at a turning point and initiate our coverage with a BUY recommendation and a target
price (TP) of SAR 51.1 implying an upside of 28% to the last of SAR 39.9 per share. In contrast, we believe Mobily
is almost fairly valued at current price levels and start our coverage of the stock with a HOLD recommendation and a
TP of SAR 80.6, suggesting a moderate upside of 8% to the most recent closing price of SAR 74.8 per share.
Page 6
While Mobily, is a more purist play, continuing to command a sector premium, we believe the regained traction at
STC will shrink the gap in 2013. We see the recent weakness in STCs shares, on the back of the one-off expenses
recorded in 4Q 2012, as an attractive entry point. STC is down ~8% YTD, compared to a rise of around 8% for
Mobily.
STC is our top pick

Company
International diversification
prospects overshadowed by
ongoing tension in the
region; a drag on STCs
valuation
Rating
Investment merits
Investment risks
Saudi
Telecom
Company
(STC AB)
BUY
Etihad
Etisalat/
Mobile
(EEC AB)
HOLD
Well established infrastructure to

support broadband demand
Pricing power in high-speed
broadband services
Attracting customers through
bundled service offerings
International growth avenues;
diversified income streams
Attractive dividend yield
Industry leading ROEs

Market leadership in Mobile
broadband
A priced asset for Etisalats regional
growth ambition
Attractive dividend yield
Legacy PSTN network to

drag companys ROE
Near-term risks attached
with international
operations
Bahrain/Kuwait and India
Declining market share
in mobile services
Recent management
changes pose near term
risks
Faster migration of
broadband data into
fixed networks
Source: Saudi Fransi Capital analysis

Both STC and Mobily are trading at a P/E of 9.0x on 2013 earnings in line with GCC peers, but at a discount of 10%
to their counterparts in the Middle East and Africa (MEA). On EV/ EBITDA basis, STC is trading at 4.6x on 2013
EBITDA, a 17% discount to MEA and 1% discount to GCC peers, while Mobily trades at a 24% premium to MEA
peers and 48% premium to GCC peers.
Current valuation under prices improving growth/risk profile of telcos

Saudi Telecom Index valuation trend
Saudi Telecom Index valuation trend
(Past P/E and P/B based on historical prices/ forward

multiples based on current prices)
(Past EV/EBITDA and EV/ Sales based on historical prices

/ forward multiples based on current prices)
20
9.4
10
18.0
8.2
14.9
15
7.1
7.0
13.1
12.3
6.4
6.2
10.9
10.9
6.0
9.9
10
4
3.1
2.8
2.1
5
2.2
2.2
1.8
1.9
2.1
1.9
1.7
2.3
2.2
2.1
0
2009
Page 7
2.2
2010
2011
2012 Current 2013e 2014e
Price/Earnings (x)
Price/Book Value (x)
Linear (Price/Earnings (x))
Linear (Price/Book Value (x))
2009
2010
2011
2012 Current 2013e 2014e
EV/Sales
EV/EBITDA
Linear (EV/Sales)
Linear (EV/EBITDA)
12
60
Size of bubble indicates market cap

55
10
Maroc
Telecom
Vodacom
50
Maroc
Telecom
6
4
Mobily
EBITDA Margin (%) 2011
Price- B ook 2013e
MTN
Turkcell
Du
Omantel
Qtel
Batelco
0
7
STC
9
Zain
Etisalat Kuwait
Jordan
Telecom
11
13
Price- Earnings 2013e
Zain
Kuwait
MTN
Qtel
45
Omantel
Jordan
Telecom
40
STC
35
Mobily
Du
Vodacom
Batelco
30
Turkcell
Etisalat
25
15
5
6
7
EV / EBITDA 2013e
Potential to drive asset returns higher; capex cycle is mostly behind especially for STC
The declining capex-to-sales ratio augurs well for the sectors asset return. We expect STCs capex-to-sales to
moderate further to 13% during the forecast period, while Mobily is expected to maintain an average 16% capex-tosales for the next five years. Mobile network coverage is well in place for both STC and Mobily (>95% in Saudi
Arabia) and services such as ADSL, FTTH and 3G/4G are being made network ready. With the international
operations of STC gaining traction and FTTH services taking off in Saudi Arabia, STC is thus expected to see its
capex-to-sales decline from a peak 15% expected in 2013 to 13% by 2017. In comparison, mature global players
have capex-to-sales ratios of around 10-13% - implying our assumption is on the conservative side. However, for
STC, the legacy PSTN network is expected to remain a drag on returns, which explains the gap in ROE/ROA
between Mobily and STC. This would continue to be a structural gap between the telcos, with Mobily warranting a
sector premium.
ROE/ROA of Saudi telcos vs. MEA peers

Return on Equity (%) (LFY)*
MEA - Median
Maroc Telecom
MTN
Vodacom
Turkcell
Jordan Telecom
Qtel
Zain Kuwait
Omantel
Batelco
Du
Etisalat
Mobily
STC
Return on Assets (%) (LFY)
22.1
44.2
24.9
60.7
11.5
22.1
14.3
12.1
23.4
11.8
19.4
22.8
30.6
16.3
0
10
20
30
40
50
60
MEA - Median
Maroc Telecom
MTN
Vodacom
Turkcell
Jordan Telecom
Qtel
Zain Kuwait
Omantel
Batelco
Du
Etisalat
Mobily
STC
8.9
17.0
12.3
22.7
7.3
13.6
2.6
8.1
16.0
8.9
8.9
7.9
15.8
7.0
0
10
15
20
25
*LFY: Last Fiscal Year

Page 8
STC offers ~2x higher free cash flow yield than Mobily
Although Mobily enjoys a superior ROE, STCs attractive free cash flow yield (~2x that of Mobily) is a positive in our
view. As a percentage of free cash flows, we believe that Mobily would re-invest 8090% in the business as it
commences network upgrade/fiber rollout; for STC, however, we see this proportion being relatively lower with most
of its FTTH expansion completed.
STC generates ~2x higher free cash flows than Mobily

STC free cash flows (SAR bn)
16
12
STC Capex as a % of free cash flows (%)

14.4
11.3
12.8
12.0
120%
100%
95.2%
83.4%
10.2
79.1%
80%
75.0%
64.9%
60%
40%
4
20%
0
0%
2013E
2014E
2015E
2016E
2017E
2013E
2014E
2015E
2016E
2017E
Mobily Capex as a % of free cash flows (%)
Mobily free cash flows (SAR bn)
120%
7
105.7%
6.3
5.9
100%
5.5
85.2%
5.0
5
81.8%
79.9%
78.1%
2015E
2016E
2017E
80%
4.2
60%
3
40%
2
20%
0%
0
2013E
2014E
2015E
2016E
2017E
2013E
2014E
Sources: Saudi Fransi Capital analysis
STC 2013e free cash flows offer a yield of 12.8% compared with Mobilys 7.3%. Therefore, at current prices, we
would prefer buying STCs cash flows to Mobilys.
Page 9
STCs attractive free cash flow yield

Free cash flow yield STC (%) 2013e-17e
20%
18.0%
18%
16%
14%
14.1%
15.1%
16.0%
Free cash flow yield Mobily (%) 2013e-17e

14%
12%
12.8%
9.5%
10%
12%
8%
10%
8%
6%
6%
4%
10.2%
11.0%
8.6%
7.3%
4%
2%
2%
0%
0%
2013E
2014E
2015E
2016E
2017E
2013E
2014E
2015E
2016E
2017E
Higher risk premium for regionally diversified STC to remain a near-term stock overhang
Despite prospects of earnings diversification and growth opportunity in international operations, the ongoing regional
tension is likely to remain an investor concern on STC for the near term. STC is relatively less exposed (than GCC
peers) to the various Middle East countries currently undergoing political tension (Egypt, Syria, Libya, Yemen and Iraq).
However, uncertainty in Bahrain and to a much lesser extent Kuwait poses a risk for STCs Viva operations in the GCC
region. In our view, the Saudi market is relatively well insulated from regional tension and Mobily offers a better risk
profile than STC. One-off charges (totaling SAR 1.2bn) during 4Q 2012 have renewed investor concerns over STCs
international operations.
Growth at home Key market forecasts

We expect Saudi telcos to deliver healthy earnings growth over the next five years (average growth of 5.1% to 8.5%
during the forecast period to 2017), led by attractive growth prospects in the domestic market. Expected increase in
broadband penetration in the Kingdom and a better mix of high ARPU data services with growing post-paid customer
base should support EBITDA margins. Penetration of high ARPU data services is expected to arrest the downtrend in
EBITDA margins; our margin projection is in the range of 36-39% over the forecast period. Both STC and Mobily are
operating at margins below the MEA average.
Broadband and data services to drive revenue growth
We project single-digit yoy revenue growth for STC and for Mobily over the next five years. Increasing broadband
Favorable environment for
adoption of high ARPU
data services
penetration is expected to drive the top line. The broadband opportunity in the Kingdom is currently untapped. A young,
tech-savvy population and growing internet user base bode well for data services. With broadband penetration as low
as 5.7% of population, the Kingdom offers significant long-term potential, compared to a GCC average of 9%. While
Mobily is expected to lead the mobile broadband market, we expect STC to benefit from a trend of increasing data
traffic through fixed line networks. Mobile broadband is witnessing a competitive pricing environment, but we see STC
commanding higher pricing power for home broadband services through its FTTH network and ability to offer bundled
services including, in addition to broadband, IP TV and landline.
Mobily to attain 40% market share in mobile by 2017; STC to dominate fixed lines
We expect Mobily to garner 40% market share (of subscribers) by 2017, inching closer to market leader STC, while
Zain KSA is forecasted to capture 15% of the total market. While ongoing challenges at ZAIN KSA are expected to
Page 10
translate into near-term gains for both STC and Mobily, we have conservatively projected some growth in Zain KSAs
long-term market share. We expect STC to continue leading the fixed line market with 90% share.
Telecom penetration levels

Target market penetration* estimate (%) 2017e
250%
210%
186%
200%
150%
100%
67%
70%
50%
70%
60%
45%
43%
0%
Fixed Line
Fixed Broadband
Mobile
2012e
Mobile Broadband
2017e

*Fixed line/ Fixed broadband penetration as a % of households
STC is expected to gain mobile market share and lose some of its advantage in fixed broadband market to Mobily.
Market share forecast

Fixed line target market share estimate (%) 2017e
120%
100%
97%
90%
80%
60%
40%
20%
10%
3%
0%
2012e
2017e
2012e
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
95%
2012e
2017e
90%
5%
Others
STC
2017e
2017e
Mobile broadband market share estimate (%) 2017e

80%
47%
73%
70%
45%
46%
2012e
10%
Mobily
STC
Mobile market share estimate (%) 2017e

48%
Fixed broadband target market share estimate (%) 2017e
55%
60%
44%
50%
42%
39%
40%
40%
30%
38%
20%
36%
10%
34%
0%
2012e
2017e
2012e
STC
Mobily
2017e
35%
40%
23%
2012e
STC
2017e
2012e
2017e
Mobily
Page 11
Key investment risks

Downside risks
Aggressive price-based competition could impact telcos profitability: We see high degree of competition in
the telecom sector, especially in the mobile and broadband markets, with Zain KSA fast establishing its market
presence. New MVNO licenses could see higher levels of competition for customer acquisition and aggressive
pricing strategies could negatively impact profitability of operators.
Political tension in the region could drive equity risk premium higher for telecom: We fail to see investors
attaching a premium for international market opportunities of Saudi telcos considering the ongoing political
tension in various Middle East/African nations. Although Saudi Arabia is well insulated from these risks and STC
operations are less exposed (than peers) to crisis-hit regions, investors could attribute a higher risk to regional
exposure. Also, poor track record of Zain and Etisalat is expected to remain a concern over the prospects of
international strategies by GCC telcos. However, at this stage, we do not foresee any risk to STCs operations in
Turkey due to Syrias ongoing crisis and Turkeys response to the same (missile deployment at the border).
Risks attached to technology changes: The telecom market is characterized by rapid technology changes,
and adoption of new market technologies could impede operator returns. STC had to scale back its WiMax
operations due to emergence of alternate technologies. Data traffic could increasingly turn to fixed Wi-Fi from
cellular network. Such trends could significantly change operator profitability and impact asset turnover in the
sector.
Moderate regulatory risks, renewed investor concern for regional telcos: Besides, new MVNO license
considerations at CITC, there could be potential new telecom licenses issued in the Kingdom however, this
seems unlikely at the moment. In event such a development would materialize, it would be detrimental to the
prospects of existing players and could significantly alter the competitive landscape and impact sector profitability
and our forecasts. The recent regulatory action in the UAE (royalty fee structure changes for Etisalat/ Du)
renewed investors concerns over regulatory risks for regional telcos, however, our understanding is that no such
plans are in the making in Saudi Arabia.
Escalation of Euro area crisis could lead to a market sell-off: While the telecom sector in Saudi Arabia is well
insulated from the Euro area crisis, renewed concerns in Europe could trigger a return of risk aversion and lead
to a market sell-off, thereby impacting overall stock market performance, including that of the telecom sector.
Upside risks
Continued challenges at Zain KSA could be positive for both STC and Mobily: We see Zain KSAs
corporate restructuring as a near-term challenge that the management is attempting to sort out. However, any
further delay in restructuring could benefit both STC and Mobily. The resulting decrease in the level of
competition within the sector could bring about positive changes to risk/ growth profile and drive STC/ Mobilys
valuation higher.
Higher uptake of new broadband services, more sustainable ARPUs: Higher than expected up take of new
broadband services in the Kingdom could sustain ARPUs higher for both STC and Mobily.
Reduction in Government charges, especially Mobile services could provide further upside: While we do
not expect any changes in the royalty fee structure, we note that CITC had earlier reduced the fixed line royalties
from (15% to 10%) post introduction of new licenses. Mobile services are charged at 15% currently and any
reduction of the same could drive margins and hence valuation positively.
Increased disclosure, especially on STCs international operations, could help reduce perceived
investment risks attached into the sector: Investor have limited insight into STCs international operations and
Page 12
are therefore attaching a risk premium to the business, something we could see decline significantly in case of
increased disclosure.
Saudi Arabian Telecom Market
Mobile services key driver

of telecom
Mobile revenue accounts for 80% of Saudi market

Revenues from domestic telecom services (comprising mobile/GSM, fixed and data) rose at a CAGR of 13.2% to SAR
65.7bn during 200511. The total sector revenue, including international operations, increased at a CAGR of 17.7% to
SAR 83.9bn during the same period.
Dominance of mobile; STC commands ~55% revenue share

Revenue market share (2008 2017e)
100%
Segment-wise trends in sector revenue (in SAR bn)

(Total excluding international revenue)
65.7
90
61.6
75
80%
52.5
49.2
60
60%
14.5
42.5
45
40%
30
34.2
38.4
9.0
9.8
0%
9.5
13.3
15.5
11.2
13.5
38.0
39.0
2008
2009
9.3
20%
15
18.2
16.6
25.2
28.5
33.2
2005
2006
2007
45.1
52.4
Mobily
Zain KSA
STC- Saudi Arabia
Mobile
Fixed & Data
2010
2011
International
Sources: CITC, Saudi Fransi Capital analysis

Revenues from mobile services have increased at a CAGR of 13% since 2005 and account for 80% of the Saudi
telecom market. Amongst all operators, STC was the most negatively impacted initially, having lost considerable
subscriber share. Nonetheless, STC commands a lead over Mobily in terms of revenue share (an estimated 55% in
Saudi Arabia in 2012).
Saturated mobile penetration in Saudi Arabia with three operators, STC leading
Saturated mobile market in
Saudi Arabia
Mobile services have been the key driver of the Saudi telecom sector. Mobile penetration increased to 191% in 2011
from 61% in 2005, reflecting a mature market. Currently, the Saudi penetration rate exceeds that in the rest of GCC,
baring the UAE. Emergence of new players such as Etihad Etisalat (Mobily) and Zain KSA ended STCs monopoly.
However, STC continues to lead the market with ~47% subscriber share. We forecast this share to decline to 45% over
the next five years due to increased competition. Mobily has acquired 39% market share in its seven years of
operations; we forecast its share to stabilize at 40% by 2017. The third operator Zain KSA was fast establishing its
market presence, but has more recently been facing financial and growth challenges, Zain KSA is likely to hold 15%
share over the next five years. We estimate penetration to rise to 210% and mobile subscriber base to 66.5mn by 2017.
Page 13
Mobily and Zain KSA expanded market presence

Mobile penetration Saudi Arabia vs. MEA/ BRIC (2011)
Tunisia
Jordan
Morocco
Algeria
Egypt
Oman
Bahrain
UAE
Kuwait
Qatar
Saudi Arabia
China
India
Russia
Brazil
Market share by subscribers Mobile (200517e)

100%
116%
120%
114%
99%
104%
90%
6%
17%
31%
80%
39%
41%
70%
156%
150%
41% 37% 39% 39%

40%
60%
218%
135%
130%
50%
40%
83%
69%
30%
191%
61%
20%
73%
74%
12% 16% 14% 14% 15%
53% 48%
47% 47% 47% 45%
10%
180%
0%
124%
2005 2006 2007 2008 2009 2010 2011 2012e2017e
0%
40% 80% 120% 160% 200% 240%
STC
Mobily
Zain KSA
Sources: ITU, IMF, CITC, Saudi Fransi Capital analysis

Led by rapid penetration of mobile services, the share of new prepaid connections in the total subscriber base
increased to nearly 88% in 2011 from 67% in 2005. However, with saturation of penetration levels, operators are
focusing on improving the post-paid customer mix. Furthermore, CITCs stricter regulation on SIM card registration
brought down the number of prepaid subscribers to 45.4mn in 3Q 2012 from 47.1mn in 2011. Accordingly, we expect
prepaid to account for 85% of the total subscribers by 2017. On the other hand, the share of postpaid subscribers is
expected to improve moderately to 15% by 2017.
Postpaid subscribers to increase; STC and Mobily benefit from weakness at Zain KSA
Prepaid/Postpaid mix Mobile (200517e)
YoY revenue growth (20094Q 2012)
100%
40%
80%
33%
30%
21%
67%
60%
77%
23%
17%
13% 12%
11%
8%
6%
3%
2%
20%
83% 85% 86% 88% 88% 87% 85%
10%
25%
7%
40%
17%
9%
2%
1%
0%
20%
33%
17% 15% 14% 12% 12% 13% 15%
Post-Paid (%)
2017e
2012e
2011
2010
2009
2008
2007
2006
0%
2005
-4%
-10%
23%
Pre-Paid (%)
-15%
-20%
2009
2010
Mobily
2011 Mar 12 Jun 12 Sep 12 Dec 12
Zain KSA
STC- Saudi Arabia
Increasing accessibility due to better affordability intensified competition and rapidly expanded the mobile segment.
Consequently, ARPUs declined to less than SAR 80 per month in 2012 (estimated) from ~SAR 150 per month in 2005.
We expect the mobile ARPUs to decline further amid the prevailing competition, segment maturity and possible
inclusion of MVNOs in the coming years. We estimate ARPU in the mobile segment to decline 14% annually during
our forecast period.
Page 14
Mobile subscriber additions at the cost of declining ARPU levels

Mobile ARPU STC/ Mobily (201117e) in SAR per month
Mobile subscribers vs. ARPU (200517e)

80
150
66.9
70
90
140
80
60
Subscribers (mn)
51.6
50
120
44.8
110
36.0
40
100
28.4
30
90
19.7
20
Subscriber additions at the

cost of ARPU contraction
53.7 53.5
80
14.1
ARPU (SAR per month)
130
70
60
50
40
70
30
10
60
20
50
2005
2007
2009
2011
2011 2012e 2013e 2014e 2015e 2016e 2017e

STC - Mobile ARPU
Mobily - Mobile ARPU
2017e

Given STCs better postpaid subscriber mix (postpaid mix of 2030% is high compared with the regional benchmark of
1015%), we continue to assign it a mobile ARPU premium of 47% over Mobily for the near term. However, over the
long term, we expect STCs ARPU to be in line with Mobily as it protects mobile market share by lowering tariffs.
Meanwhile, Mobily would increasingly chase postpaid customers, which is expected to support ARPU. Thus, we expect
faster contraction in mobile ARPU for STC over the forecast period (~4% annual) than Mobily (~1% annually).
Similar prices for mobile services leave little to differentiate on pricing front
With focus increasingly shifting toward the broadband space, there is little differentiation on the pricing front among
players providing traditional mobile services (Voice/SMS). Analysis of basic plans (STC - Sawa, Mobily 7ala and Zain
KSA Hala) indicates that prepaid pricing is mostly comparable between players, while there are differences in postpaid
offerings. For instance, all players charge prepaid customers with 55 halalas per minute for voice calls and 25 halalas
for SMS. For postpaid customers, Zain KSA (Mazaya Light plan) and STC (Jawal Easy) offer voice calls at 25/35
halalas respectively, while Mobily (Khatty) offers the same for 45 halalas.
Competitive pricing for mobile services

Mobile - Postpaid pricing Basic plans
Mobile - Prepaid pricing Basic offers

50
60
40
50
35
30
40
30
30
45
55 55 55
25
25 25 25
20 20 20
25
25 25 25
20
20
20
10
10
0
0
Fee (SAR)
Fee (SAR)
STC - Sawa
Voice Call
Mobily - 7ala
SMS
Zain KSA - Hala
Voice call: in halalas per minute; SMS: in halalas per message
STC -Jawal Easy
Voice Call
Mobily - Khatty
SMS
Zain KSA - Mazaya Light
Voice call: in halalas per minute; SMS: in halalas per

message
Page 15
We note players are competing through free benefits plans to make free calls/SMS, with STCs pricing being more
attractive. For instance, STC charges SAR 99 for monthly free benefits compared to SAR 140 by Mobily and Zain KSA.
Overall, we find Zain KSA playing the pricing game, while STC is drawing customers through free benefits offers. Zain
KSA remains the most aggressive offering attractive pricing plans.
STCs attractive pricing of free benefits plan

Free benefits plans - Charge by validity (in SAR)
160
140
140
140
120
99
100
80
60
45
45
29
40
20
10
10
0
STC - Sawa
Mobily - 7ala
1 day
Zain KSA - Hala
1 Week
1 Month
Free benefits include unlimited free calls (within network) and free SMS
Competitive pricing for iPhones; most players attracting customers through free offers
Besides competitive pricing for Voice/SMS, telcos are offering attractive pricing plans for smartphones. iPhone offerings
are competitively priced in the Kingdom, with Zain KSA triggering a competition by recently slashing prices by 1535%
across variants. However, most players are pushing the product free of cost to monetize through high APRU postpaid
connections. For instance, STC offers entry level 8GB iPhone free to customers who sign up for 12 months at SAR 249
per month, and most iPhone variants (except 64GB) free for a 18-month period. Zain offers iPhone 4 (8GB) for just
SAR 45 in its SAR 150 per month plan, while it offers iPhone free of cost in the SAR 450 per month plan(Mazaya Elite).
Mobilys offer of 8/16 GB free with SAR 349 per month plan appears the least attractive. STC also offers iPhone 5
(16Gb) free of cost for customers who sign-up for 18 months. Overall, we note that while Zain KSA has attractively
priced iPhone products, STCs free offerings are drawing relatively more customer sign ups.
Zain KSA aggressively pricing iPhone offerings

iPhone product pricing (in 000 SAR)
3.5
500
450 450
2.9 2.9
3.0
2.5 2.5
2.3
2.5
2.0
Starting plans for free iPhone offers (in SAR per month)
3.2 3.2
2.5
2.4
400
300
1.6
349 349
2.2
249 249 249
1.5
1.5
200
150
1.0
100
0.5
NA
0
0.0
4 - 8GB
STC
4S - 16GB
4S - 32GB
Mobily
4S - 64GB
Zain
STC
4 - 8GB
Mobily
4S - 16GB
Zain*
4S - 32GB
* Zain has attractively priced the iPhone 4 (8 GB) at just SAR 45
Page 16
Introduction of mobile number portability (MNP) has also increased the level of competition in the Kingdom. Although
operators are focusing on converting a share of prepaid to post-paid mix to reduce subscriber churn, we expect service
quality to determine operator switching than competitive pricing. In our view, STC has a slightly better edge over Mobily
due to its better network coverage and bundled services offerings that may inhibit operator switching. In addition, STC
can draw operational experience from Turkey (through Oger Telecom), where MNP was introduced few years back.
Quality of Service All players meet CITC benchmarks

Service quality 2011
Voice quality standards (score) 2011

4.1
2.5%
<2%
<2%
2.0%
3.9
3.8
1.5%
1.0%1.0%
1.0%
1.0%
0.61%
0.5%
4.0
4.0
0.41%
0.0%
0.0%
Unsuccessful Call rate
Call drop rate
3.7
3.7
3.6
>3.5
3.5
3.4
3.3
3.2
STC
STC
Mobily
Zain KSA
CITC Standards
3.7
Mobily
Zain KSA
CITC
Standards

Operators are also cashing in on the high traffic during the Hajj season (Islamic pilgrimage) in the Kingdom. STC
launched two types of SAWA Haj SIM cards for the Haj season. STC also provided IP based Virtual Private Network
(IPVPN) connectivity to all railway stations. Mobily too is investing for Hajj traffic adding 150 new towers at Makkah and
Mashair. In addition, Mobily provided free internet access to pilgrims via WiFi in select regions. Mobily also tied up with
Bahrain Air for distribution of free pre-paid SIMs for travelers. Overall, we find STC at a relative competitive advantage
over Mobily due to its operating presence in Muslim populated countries such as Malaysia / Indonesia, who are
frequent travelers for Hajj season.
Note that the Hajj season which in recent years has been commencing in the fourth quarter and will continue to do so
for the next couple of years has some impact on earnings seasonality. Typically, the quarter accounted for an average
27% of total annual revenue in 2011 and 2012. Due to differences between the lunar and solar year/calendar the
starting date for the pilgrimage will be 10-11 days earlier each year. The Hajj is expected to move into the third quarter
(both commencements and finalization) starting 2015.
STCs dominance in fixed line to continue

Fixed line market in Saudi
Arabia relatively less
competitive; STC to
dominate the segment
The Kingdom had 4.7mn fixed line subscribers in 3Q 2012 (please see Appendix A for subscriber data across fixed,
mobile and broadband services). An estimated 72% (3.4mn) are connected to households, with the balance 28%
(1.4mn) attributed to businesses.
Most notably, fixed line subscriptions are turning the tide and delivering growth again. Total subscribers picked up to
4.7mn, supported by growth in both segments, after an initial stagnation around the 4-4.2mn level during 2007-2010.
We believe, this offers further indication of STCs renewed push which has been enhanced by better offers and
bundling services and thus bringing supposedly dying assets/capabilities back to life as part of a comprehensive
customer experience. STC currently holds an estimated 97% market share of fixed lines.
Page 17
STC loses share to competition; room for growth in fixed lines

Fixed line penetration Saudi Arabia vs. MEA/ BRIC (2011)
Tunisia
Jordan
Morocco
Algeria
Egypt
Oman
Bahrain
UAE
Kuwait
Qatar
Saudi Arabia
China
India
Russia
Brazil
Market share trends in fixed line segment (200517e)

100%
11.4%
7.4%
11.1%
8.5%
10.8%
9.3%
2%
3%
10%
94%
34.0%
15.8%
17.3%
16.4%
21.2%
92%
90%
100% 100% 100% 100% 100%
99% 99%
97%
88%
90%
2.7%
31.0%
22.1%
10%
1%
96%
24.5%
0%
1%
98%
20%
30%
86%
84%
40%
2005 2006 2007 2008 2009 2010 2011 2012e2017e

STC
Others
Sources: CITC, Company reports, Saudi Fransi Capital analysis

Nevertheless, faster adoption of mobile services in the Kingdom suppressed the subscriber base for fixed lines, which
grew at a CAGR of just 3.9% since 2005 vis--vis 25% for mobile. In line with regional trends of fixed to mobile
substitution, we forecast a moderate increase in fixed line penetration. STC is expected to continue to lead with 90%
market share until 2017, while new operators such as Etihad Atheeb (Go brand) is expected to capture the rest.
We forecast the number of residential lines in Saudi Arabia to increase at a CAGR of 5.5% during 201117 and reach
4.1mn toward the end of our projection period. In addition to growth in the consumer market, the enterprise/corporate
sector offers key opportunities for Saudi telcos. We expect STC to sustain its competitive advantage in this segment.
The company accounts for the majority of the Kingdoms backbone infrastructure capacity (please see Appendix B for
STCs infrastructure details of STC); in fact, even competitors rely on this capacity. We expect the number of business
lines to increase at a CAGR of 9.3% to 2.2mn between 2011 and 2017.
Unlike the mobile segment, fixed line is less competitive. However, faster penetration of mobile services (subsititution
effect) has dented ARPU in the fixed line segment. We estimate ARPU in residential fixed line to have declined to less
than SAR 125 per month in 2012 from ~SAR 210 per month in 2005. We expect ARPU in the residential sector to
continue falling due to competition from mobile offerings. STC, which dominates the fixed line market in the Kingdom, is
now offering bundled services (broadband) to fixed line subscribers to arrest the fall in ARPU. Through its Jood
packages, STC offers high-speed internet services along with unlimited fixed local/national calls and attractive
discounts on calls to international numbers.
Unlike residential fixed line, business line yields relatively better ARPU (estimated at ~1.5x), stemming from higher
minute usage/ data. We estimate ARPU in business fixed line to have declined to less than SAR 190 per month in 2012
from ~SAR 315 per month in 2005. During our forecast horizon, we expect ARPU in fixed line to decline 14% annually
for both residential and business lines.
Page 18
Fixed line subscriber growth picking up, sharp decline in ARPU levels
Residential fixed line subscribers (200517e)
3.5
3
3.0 3.0 3.1

2.8 2.9 2.9
3.5
3.3
220
200
180
2.5
2
160
1.5
140
120
0.5
100
0
2007
2009
Residential lines
2011
350
320
80
2005
2.2
240
2017e
ARPU (RHS)
290
1.5
1.1 1.2 1.0
1.0 1.1
1
260
1.4
1.3
230
200
0.9
170
140
0.5
Residential lines (mn)
Business line subscribers vs. ARPU (200517e)

2.5
Business lines (mn)
4.1
4.5
110
0
80
2005
2007
2009
Business lines
2011
2017e
ARPU (RHS)

The wider economic development in Saudi Arabia, is translating into establishment of new economic cities, and
favorable investment climate is driving new business establishments, thereby creating robust demand for connectivity.
Development initiatives in the ICT sector by the government also bode well for enterprise sector demand. The
increasing number of new establishments in the Kingdom is a positive for the segment growth prospects. STC has long
enjoyed competitive advantage over peers due to its long-standing relationship with large corporations.
The favorable investment climate for new enterprises in the Kingdom and demand from SMEs are expected to drive
uptake in the business lines. While the global economy has been in turmoil, Saudi GDP growth has run between 5.17.1% over the past three years and it is projected to expand by 4.2% in 2013 according to IMF. Meanwhile, bank
lending continues to expand at a rate of 17% (3Q 2012) - providing further indication of the growth underway and
prospects for expansion in business line uptake.
STCs current focus is on medium and large-sized businesses, while SME is considered an attractive growth market,
going forward. The company has more than 55 corporate sales outlets in the Kingdom and has won several prestigious
smart city projects such as KEC, ITCC, KAFD, and Olaya Towers & Knowledge City.
However, new players Zain KSA, Etihad Atheeb and Mobily are increasingly capitalizing on enterprise market
opportunities in Saudi Arabia. Despite challenges, Zain KSA could make inroads into the enterprise segment
(specifically targeting global players having presence in the Kingdom) through its strategic partnership with Vodafone.
According to Mobily, the size of the ICT market for enterprise segment in Saudi Arabia is estimated to reach SAR 29bn
by 2015.
Broadband opportunity untapped; attractive growth prospects for data services

The Saudi mobile market is saturated with a penetration of 191% in 2011, higher than the GCC average. Furthermore,
increasing competition from new players is clouding growth prospects. However, we expect opportunities in broadband
and data to drive Saudi telcos. Broadband penetration in the Kingdom is currently low at 6% of the population and
below the GCC average. Increasing internet users, favorable demographics (high percentage of tech-savvy young
population, ~57% are below 30 years), and rising smartphone uptake in the Kingdom would drive the broadband
market. Internet users in the Kingdom increased to 15.2mn in 3Q 2012 from just 3mn in 2005, reflecting an average
annual growth rate of 27%.
Page 19
Mobily a clear leader in mobile broadband; STC closing in

Mobile broadband Subscribers vs. ARPU
22.3
130
18.1
16.2
120
14.2
15
11.3
110
12.4
100
10
90
80
5
1.4
100%
70
2.7
60%
2013e
2015e
4%
5%
7%
8%
9%
10%
66% 62% 59% 55%

83% 85% 77% 73% 69%
20%
30% 33% 35%

23% 25% 28%
16% 13% 20%
0%
2017e
2009
Subscribers
3%
40%
50
2011
2%
80%
60
2009
1%
140
20.2
20
Mobile broadband Mrket share (%)
150
Mobile Broadband Subsrciber (mn)
25
ARPU (RHS)
2011
STC
2013e
Mobily
2015e
Zain KSA
2017e

We forecast the mobile broadband subscribers to reach 22.3mn towards the end of our projection period, implying a
CAGR of 11.9% for the period 2011-2017. We expect Mobily to lose out its initial advantage in the mobile broadband
space to STC/ competition and expect, STC to make market share gains (to 35% by 2017) as against an estimated
23% in 2012 while Mobily is expected to retain its leadership position with 55% share of the market in 2017.
For the fixed broadband market we forecast subscribers to reach 3.5mn towards the end of our projection period,
implying a CAGR of 10.5% for the period 2011-2017. STC dominates the fixed broadband segment and is expected to
retain 90% of the market share during the forecast period. However, competition from Mobily is expected to remain
high given its plans for an aggressive fixed broadband strategy, posing a long-term threat to STCs dominance in this
segment.
STC to dominate the fixed broadband market

Fixed broadband Subscribers vs. ARPU
3.5
3.3
3.0
130
2.6
2.3
1.7
120
2.0
110
100
1.4
90
80
100%
0%
2%
4%
5%
6%
150
140
2.8
160
70
Fixed Broadband Subscribers (mn)
Fixed broadband Market share (%)

7%
8%
9%
10%
80%
60%
40%
100% 98% 96% 95%

94% 93% 92% 91% 90%
20%
60
0
50
2009
2011
2013e
Subscribers
2015e
2017e
ARPU (RHS)
0%
2009
2011
STC
2013e
2015e
Mobily
2017e
We estimate ARPU in broadband to have declined to less than SAR 100 per month in 2012 from ~SAR 180 per month
in 2007. We expect a moderate 14% decline annually in ARPU during the forecast period. In terms of pricing in mobile
broadband, STC and Mobily are comparable; however, the former commands a 1825% premium on home broadband.
We do not expect Zains aggressive pricing to remain sustainable in the mobile broadband segment.
Page 20
Competitive pricing for broadband, but STC holds substantial advantage in fixed
Mobile broadband plans SAR per month
400
350
350
Home broadband plans SAR per month

300
249
350
250
199
199
280
300
200
250
199
175
169
200
149
149
199
150
200
100
150
100
100
99
100
50
40
50
NA
0
0
1GB/ 2GB
STC - QUICKnet
5 GB
Mobily - Connect
Unlimited
Zain KSA - Speed 4G
2/4 MBps
STC - Jood
1MBps
512Kbps
Mobily - Broadband @ home
Etihad Atheeb - Go
Zain KSA competes on

pricing in mobile
broadband; STC commands
pricing power in high-speed
broadband
STCs superior pricing power for high-speed FTTH services

STC enjoys superior pricing power for FTTH services, which offers speeds up to 200 Mbps, significantly higher than
its peers. The company priced high-speed offerings at ~2-3x that of the current 2/4 Mb offerings of competitors. We
consider this sustainable in the near term, as competitor Mobily is behind STC in terms of cable reach in the kingdom
(FTTH coverage ~1/10 that of STC) and expect STC to enjoy the first mover advantage in the near term. However,
we expect a significant fall in FTTH broadband pricing over the long term.
STCs superior pricing power for high-speed FTTH offerings

STCs FTTH pricing for various speeds (in SAR per month)
900
799
800
700
Average pricing of competitors
600
500
400
346
296
300
249
200
100
0
4 Mbps
20 Mbps
40 Mbps
200 Mbps
Page 21
Internet usage in Saudi Arabia has substantial room for growth

Benchmarked with the MEA region, we believe internet usage in Saudi Arabia is low, indicating the growth momentum
would continue in the near term. Also keep in mind that in the absence of entertainment options like cinema, we believe
the significance of broadband as an entertainment gateway is potentially much higher than less conservative markets.
Similarly, access to computers in the Kingdom leaves room for growth and government initiatives toward overall
Information Communication and Technology (ICT) development bode well for the sector.
Room for further penetration of computers/internet users in Saudi Arabia

Internet users Saudi Arabia vs. MEA/BRIC (2011)
Tunisia
Jordan
Morocco
Algeria
Egypt
Oman
Bahrain
UAE
Kuwait
Qatar
Saudi Arabia
China
India
Russia
Brazil
39.1%
34.9%
51.0%
14.0%
35.6%
68.0%
77.0%
70.0%
74.2%
86.2%
47.5%
38.3%
10.1%
49.0%
45.0%
0%
20%
40%
60%
80%
100%
Computer access Saudi Arabia vs. MEA/BRIC (2011)

Tunisia
Jordan
Morocco
Algeria
Oman
Bahrain
UAE
Kuwait
Qatar
Saudi Arabia
China
India
Russia
Brazil
19.1%
51.4%
34.2%
20.0%
58.0%
87.0%
76.0%
69.0%
87.0%
57.3%
35.4%
6.1%
55.0%
45.4%
0%
20%
40%
60%
80%
100%

Increasing internet users
and tech-savvy, young
population in Saudi Arabia
positives for broadband
uptake
Page 22
According to Communications and Information Technology Commission (CITC), there were 11.7mn mobile broadband
subscribers in 3Q 2012 compared with just 1.4mn at the end of 2009. The Kingdoms mobile broadband penetration
reached 41% at the end of 3Q 2012, and is comparable with that of the developed world. While the traditional voice
market is on the decline, broadband opportunities through ADSL and FTTH services offer growth opportunities in the
fixed line market. Fixed line technologies offer superior speeds compared to Mobile broadband. (See Appendix C for
more details of technologies in Fixed/ Mobile). STC has a comprehensive strategy of bundling content and applications
into its high-speed network infrastructure and is positioning itself through triple play offers as a one-stop shop for
communication and entertainment. Through Interactive TV services (InVision), STC is successfully playing up the
entertainment appeal, which is strong in Saudi Arabia. The company also owns 71% stake in Dubai based Intigral, now
a leading regional provider of content services and digital media serving several regional operators. Besides
distributing content, Intigrals main competitive advantage is its proprietary methods of content management allowing
content to be tailored and facilitate user censoring. For example, InVision users will get a heads-up if an upcoming
scene could be unsuitable by Saudi norms, through the movie or tv show turning into slow-motion seconds before
thus allowing the user to skip if they desire.
Low broadband penetration levels in the Kingdom; rising trend of net users positive
Broadband penetration Saudi Arabia vs MEA/ BRIC (2011)
Tunisia
Jordan
Morocco
Algeria
Egypt
Oman
Bahrain
UAE
Kuwait
Qatar
Saudi Arabia
China
India
Russia
Brazil
5.1%
3.2%
1.8%
2.8%
2.3%
1.7%
Trend in internet users (2005-3Q 2012)

15.2
16.0
13.6
14.0
12.0
1.3%
7.6
8.0
6.0
9.2%
4.0
5.7%
45%
10.3
9.3
10.0
16.2%
16.1%
55%
11.4
35%
4.8
25%
3.0
15%
11.6%
2.0
1.1%
-
12.2%
8.6%
0%
4%
8%
12%
16%
20%
5%
2005 2006 2007 2008 2009 2010 2011 3Q
2012
Internet Users
% of Population (RHS)

With increasing internet users, social network usage in the Kingdom has grown. The number of users on Twitter and
Facebook in the Kingdom is growing across all age and social groups. According to CITC, there were an estimated
4.8mn users of Facebook in Saudi Arabia at the end of 2011, a penetration rate of 16.8% and 35.3% of total internet
users.
High per capita GDP and young population positives for sector
% population under 30 years
Tunisia
Jordan
Morocco
Algeria
Egypt
Oman
Bahrain
UAE
Kuwait
Qatar
Saudi Arabia
China
India
Russia
Brazil
Per capita GDP 2011 (USD)
44.0%
54.7%
47.0%
47.8%
48.9%
62.9%
49.5%
49.6%
54.4%
44.8%
57.0%
43.2%
57.9%
37.1%
50.9%
30%
40%
50%
60%
70%
Tunisia
Jordan
Morocco
Algeria
Egypt
Oman
Bahrain
UAE
Kuwait
Qatar
Saudi Arabia
China
India
Russia
Brazil
4,317
4,618
3,084
5,503
2,932
23,572
22,918
63,626
43,723
98,144
21,196
5,417
1,514
12,993
2,493
0
20,000 40,000 60,000 80,000 100,000
Sources: UN, IMF, Saudi Fransi Capital analysis

Alongside growing internet users, Smartphone penetration in the Kingdom is picking up. Industry sources cite one in
every two handsets sold in the Kingdom is a smartphone. According to Informa Telecoms and Media, Saudi Arabia had
a smartphone penetration rate of 17.1% in 2011, which is expected to reach 44.8% by 2015. Besides, driving demand
for data services, higher smartphone penetration is expected to increase overall mobile penetration rate due to the
presence of some dual-SIM models and many Saudis carrying more than one handset. Industry surveys point toward
high adoption of smartphones, tablets and laptops in the Kingdom, well ahead of many developed markets.
Page 23
High penetration of tablets & smartphones in KSA; data traffic to multiply by 2016
Tablet/Smartphone/Laptop usage
7%
Spain
38%
6%
Italy
Laptop/ Netbook
44%
49%
7%
France
Data traffic forecast (MB per month) by type of device
50%
Tablet
26%
5%
24%
UAE
Smartphones and tablets are

well penetrated in the
Kingdom; data traffic set to
surge
0%
Tablet
20%
Smartphone
Smartphone
61%
68%
16%
Saudi Arabia
~8.2x
28%
30%
Portable gaming console
Egypt
~3.3x
60%
63%
40%
60%
2016e
2011
~25x
~17x
Non smartphone device

In MB per month per device
0 2,000 4,000 6,000 8,000
80%
Laptop/ Notebook
Sources: Cisco, Google survey(2012), Saudi Fransi Capital analysis

The high penetration of data-centric devices in the Kingdom is expected to drive data traffic multi-fold. According to
Cisco, globally the average monthly data traffic of smartphones is forecasted to surge 17 times (from 150Mb per month
per device in 2011 to average 2.6Gb per month by 2016). Data usage levels in laptops/notebooks would continue to
remain the highest and multiply by 3.3x between 2011 and 2016 (from 1.5Gb per month per device in 2011 to average
6.9Gb per month by 2016).
While the demand environment for broadband services in the Kingdom is well in place, the access route toward the
same is likely to determine operators success over the long term. STC is aggressively rolling out both mobile
broadband and fixed line networks for offering broadband services, while Mobily is riding on the fast adoption of mobile
broadband services in the Kingdom. According to Cisco, global data traffic is carried predominantly through fixed
network, but mobile is expected to increase its share to 17% by 2016 from 5% in 2011. Driven by rising smartphone
penetration and net users, the consumer space is forecasted to account for 77% of data traffic compared with 51% in
2011.
Fixed networks dominate global data traffic; Consumer segment to surge

Data Traffic forecast by type of network 2011 & 2016e
100%
Globally, fixed networks carry
higher data traffic than
mobile; consumer segment to
outpace business demand in
data usage
Data Traffic forecast by segment 2011 & 2016e

100%
5%
17%
23%
80%
80%
60%
60%
49%
95%
83%
40%
20%
40%
20%
0%
77%
51%
0%
2011
Fixed
2016e
Mobile
2011
Consumer
2016e
Business
Sources: Cisco, Saudi Fransi Capital analysis

STC accounted for an estimated 90% of the total daily Internet and data traffic, which exceeded 1,600Tb in Saudi
Arabia, in 2011. Moreover, the companys superior and upgraded fixed broadband network, which now extends to
nearly 300,000 km in the Kingdom (compared to an estimated 30,000 km for Mobily), is a further testament to its strong
position in the high-growth data segment.
Page 24
Trend reversal of fixed-mobile substitution could unfold in data service; STC at a competitive advantage
Wi-Fi access gains prominence

in Saudi Arabia; STC may
monetize fixed network
investments
Unlike voice services (where mobile services substituted fixed lines), emerging technology trend of data service
adoption through Wi-Fi networks (vs. using a cellular network) is gaining traction across many developed markets. We
expect data market adoption trends in Saudi Arabia to be characterized by regional/global trends. According to Cisco,
data traffic volumes in the MEA region were mostly through fixed lines, accounting for 95% in 2011 and expected to
reach 83% by 2016, reflecting a CAGR of 53%, while mobile data traffic is expected to outpace fixed traffic with a
CAGR of 103%, during the same period, from a much lower base.
Tablet users prefer WiFi/WLAN; Smartphone users prefer mobile networks

Data access mode Tablet/ Notebook
Data access mode Smartphones
100%
80%
75%
79%
80%
64%
60%
40%
97%
100%
83%
62%
55%
38%
60%
48%
42%
48% 45%
41%
63%
53%
40%
23%
16%
20%
77%
69%
65%
60%
57%
20%
20%
4%
0%
0%
Saudi UAE Russia
Arabia
WiFi/ WLAN @ home
Italy
France Spain
UMTS/3G/4G/LTE
Saudi UAE Egypt

Arabia
WiFi/ WLAN @ home
Italy
France Spain
UMTS/3G/4G/LTE
Sources: Google survey (2012), Saudi Fransi Capital analysis

The evolving trend of mobile traffic getting offloaded through fixed networks offers significant long-term prospects for
fixed line operators such as STC. The drivers of mobile-fixed transition include bandwidth constraints for mobile in highdensity population areas, spectrum constraints limiting scalability of services, and relatively poor indoor connectivity of
mobile broadband. Fixed broadband connectivity, thus, offers a better technology option to address the growing
demand for data services in the long term.
According to a Google survey, in Saudi Arabia, WiFi/WLAN is the preferred data access route among tablet users, while
mobile is being mostly used for smartphones. Thus, STC would potentially look to monetize its fixed network
investments by tapping Wi-Fi opportunities. STC is successfully adding customers through service bundling (triple-play
offerings) and is thus placing data-heavy entertainment services into its high-speed fixed broadband network. More than
300,000 km of fiber-optic cable are already operational in the Kingdom and STCs FTTH services, branded as VERVE,
offer broadband speeds up to 1 GBps far greater than any other competitor. In addition to attractive service offerings,
STC attracts customers through integrated services and billing across fixed line and broadband services. Besides
opportunities in the residential market, an anticipated shift toward e-government/e-health in Saudi Arabia is likely to
benefit Saudi telcos, primarily STC.
Page 25
Intensifying competition; STC enjoys pricing power in FTTH

Broadband and data being the next leg of growth for telecom, operators are increasingly chasing the market across
segments. STC dominance in fixed broadband is being challenged by Mobily. Through its acquisition of Bayanat Al
Oula, Mobily is targeting the demand for high-speed Internet by offering service through its 3.5G network. Fixed line
broadband competition in the Fiber-to-home market is also expected to intensify with new players deploying competing
networks and have strong support from GCC incumbentsBatelco and Etisalat. However, STC is expected to retain its
competitive advantage of attracting customers through bundled service offerings. In addition, we see the recent
slowdown in Zain KSA (sales down on YoY basis) benefitting both STC and Mobily.
While overall revenue growth for the sector is showing moderate signs of improvement, we belive ARPUs would be
supported by:
a)
Expected pick up in postpaid customer mix: Operators are focusing on prepaid to postpaid conversion. For
instance, STC continued to push for prepaid to postpaid migration in 2009 by offering 2G SAWA customers
an upgrade option to a 3G postpaid plan for no additional fees while retaining the number. In fact, we see
postpaid subscribers increasing at a faster pace than prepaid, indicating that operators are successfully
migrating the user base.
b)
Challenges at Zain KSA offer near-term advantage for both STC and Mobily: Aggressive pricing by Zain KSA
may not be a sustainable business strategy for the company currently. Zain has priced its mobile broadband
offerings (Speed 4G) at a discount to STC/Mobily rates.
c)
Uptake in data services to support ARPUs: Current pricing plans for mobile broadband are ~1.52x the
estimated sector ARPU. We estimate fixed line ARPUs to deteriorate at a much slower pace than mobile
ARPUs. While the traditional voice market is on a decline, broadband opportunities through ADSL and FTTH
services offer scope for growth in the fixed line market. In fact, we see STC enjoying pricing power through its
bundled services and ability to offer a one-stop shop for communication, business and gradually also
entertainment The ongoing gradual shift to e-government and e-health services coupled with existing links to
government provide further strength to the story.
Margins under pressure; high ARPU data services to drive EBITDA

EBITDA margins under
pressure; falling ARPUs and
increasing acquisition costs
impact margins
Amid growth opportunities, the high degree of competition amongst telcos in Saudi Arabia is impacting operator
margins. EBITDA margins have contracted to low 30s from high 40s over the past 56 years. While the entry of new
players pushed mobile penetration higher, sector profitability was impacted by a) downward pressure on ARPUs
resulting from competitive pricing and b) higher sales and marketing costs subscriber acquisition costs. However,
telcos have focused on cost cutting measures to partly offset the negative impact on margins by reducing General and
Administration expenses.
Margin trend less favorable; competition impacts margins

EBITDA margin trend for Saudi Telcos (20074Q 2012)
50%
Gross margin trend for Saudi telcos (2007 4Q 2012)

65%
46%
60%
60%
45%
59%
56%
41%
55%
40%
36%
35%
61%
35%
35%
34% 35%
54%
55% 55%
54%
53%
50%
33%
30%
45%
30%
40%
25%
2007 2008 2009 2010 2011 Mar Jun Sep
12
12
12
STC
Mobily
Industry
Dec
12
2007 2008 2009 2010 2011 Mar Jun Sep

12
12
12
STC
Mobily
Industry
Dec
12
Page 26
High acquisition costs; telcos focus on cutting overhead costs

Selling and marketing as a % of revenue (20074Q 2012)
General and Admin. as a % of revenue (20074Q 2012)

16%
16%
14%
14%
14%
14%
13% 13%
13%
12%
10%
10%
8%
13%
12%
12%
6%
14%
8%
8%
8%
7%
6%
7%
8%
7%
8%
7% 7%
6%
4%
4%
2%
2%
0%
0%
2007 2008 2009 2010 2011 Mar Jun Sep Dec
12
12
12
12
STC
Mobily
Industry
2007 2008 2009 2010 2011 Mar Jun Sep

12
12
12
STC
Mobily
Industry
Dec
12

We expect increased adoption of data services to drive EBTIDA margins. The reasonably affluent characteristic of the
population (high per capita income) makes Saudi Arabia a market that could adopt high ARPU value-added services
such as online gaming, video streaming and other data heavy applications.
High bad debt provision for STC, potential to improve exists
STC incurred SAR 1.6bn as bad debt provision in 2012, significantly higher than SAR 236mn incurred at Mobily. As a
percentage of sales STC incurred a cost of 2.7% as a result of high bad debt provision in 2012 compared to just
1.0% in Mobily. While this reflects Mobilys superior management of receivables, we see this as an area STC could
potentially improve going forward. However, we note that receivable days at STC is significantly lower at STC (~60
days) compared to Mobily (~90 days) in 2012. Mobily is thus offering extended credit days to ensure a more
profitable operation than STC.
STC incurs bad-debt costs ~ 6-7x that of Mobily, room for improvement
Receivable DSOs: STC vs Mobily
Bad debt provisions as % of sales: STC vs Mobily

5%
180
4%
150
153
3.0%
3.0%
3%
2.4%
2.7%
1.9%
2%
115
120
105
0.9%
1%
0.8%
0.9%
63
1.0%
60
91
82
90
1.5%
1.1%
131
3.1%
62
53
61
57
61
2011
2012
30
0%
2007
2008
2009
2010
2011
2012
0
STC
Mobily
2007
2008
2009
STC
2010
Mobily
Tower sharing opportunity

could reduce operating
expenses by 1215% a
potential margin driver.
Page 27
Potential value creation opportunity through network sharing for both STC and Mobily
Amid high competition impacting profitability, we see asset sharing opportunity for both STC and Mobily potentially
driving cost synergies. In fact, STC currently offer mobile site sharing services, allowing competitors to put their base
station antennas on STC towers. STC's network consists of around 5,000 base stations covering around 97% of the
population. In addition, industry sources cite potential capex savings for new installations through tower sharing, a
positive for cash flows. Competitor Mobily has already initiated development in network sharing. The company recently
announced infrastructure sharing with Atheeb Telecom in the fixed broadband segment. Synergistic opportunities thus
exist for Saudi telcos through potential sharing of each others assets to tap the broadband market opportunity, an
arrangement that could gather prominence in the near future. However, we highlight that there is no decision yet on
this topic and note that a key driver for tower sharing globally has been funding requirements (through selling towers to
third party). STC and Mobily do not have the same urge for new funds. In addition, we sense that there is a degree of
uncertainty surrounding the comparative gains from this.
STC ahead in capex cycle; opportunity to drive asset returns higher

In order to tap the emerging opportunities in data and broadband services in the Kingdom, Saudi telcos are
aggressively investing in building a network infrastructure to support these services. Mobile network coverage is well in
place for both STC and Mobily (>95% in Saudi Arabia). Services such as ADSL, FTTH and 3G/4G is been made
network ready. STC launched commercial 4G Long Term Evolution (LTE) mobile broadband networks in 2H 2011 and
has presence in over 38 cities. STC aims to achieve 4G mobile broadband network coverage of 95% of the population
by 2014. Similarly, Mobilys 4G LTE network, operated by subsidiary Bayanat Al-Oula, has coverage in 31 cities and is
targeted to cover 85% of the Saudi population. STC is also fast rolling out its fiber-based internet services in the
Kingdom. The sectors capex-to-sales ratio is on decline (24% in 2007 to ~16% in 4Q 2012). We expect ROA for both
STC and Mobily to be driven by these investments. Thus, capex is mostly lower for STC, with the potential to improve
asset turnover. Ex-acquisitions, STCs capex-to-sales declined from 17% in 2007 and is expected to reach 13% by
2017, while for Mobily, capex-to-sales is estimated to be relatively higher at ~18% over the next three years and
thereafter decrease to 16% by 2017. In comparison, mature global players are typically sustaining a capex/sales ratio
of 10-13% - our figures on Saudi operators are more conservative.
Capex cycle mostly behind; network deployed for value-added services

STCs Capex-to-sales ( ex-acquisitions) (2007 2017e)
18%
17%
14%
14%
30%
16%
16%
15%
15%
15%
14%
25%
27%
24%
13%
12% 12%
12%
Mobilys Capex-to-sales (ex- acquisitions) (20072017e)
25%
10%
10%
21%
21%
18%
20%
17%
16%16%16%16%
15%
8%
Decreasing capex-to-sales
ratio a positive; network
coverage well in place across
technologies
10%
6%
4%
5%
2%
0%
0%
2007
2009
2011
2013E
2015E
2017E
2007
2009
2011
2013E
2015E
2017E
Moderate regulatory risks & stable royalty fees

Post the introduction of Zain KSA, the third mobile operator, we believe the regulatory environment has moderated
significantly. While CITC is pursuing an overall developmental goal for the telecom sector, we see limited risks ahead
for the sector. The CITC is working on introducing MVNO licenses, and recently requested proposals from interested
th
parties with a deadline set for May 4 2013.
In a scenario of new MVNO licenses, we expect entry of well-established regional operators into Saudi Arabia. For
instance, players such as Du (UAE) have already expressed interest in exploring the MVNO opportunity in the
Kingdom. Q-tel amongst other telcos, which was outbid by Zain KSA for the third mobile license, could look to
participate in the MVNO opportunity. Considering that MVNO typically chases the low ARPU/untapped customer
segments, we see Zain KSA at a larger risk than STC/Mobily. Furthermore, considering the ongoing challenges at Zain
KSA, the new entrants are likely to target its customer base. European experience of MVNOs indicate that a potential 5
-10% share, could be captured by the new players. STC is expected to be at a competitive advantage over Mobily, as it
Page 28
could draw operational and managerial expertise from Oger Telecom (35% stake) which runs a successful MVNO in
South Africa Virgin Mobile through its holdings in Cell C. Also, MVNO could present STC with a wholesale business
opportunity, allowing it to sell excess bandwidth to new players.
Overall, we see moderate regulatory risks to the sector, which are overshadowed by strong market and growth
fundamentals underpinned by growing demand for data services and we find STC at a relative competitive advantage
over its peers. We also highlight, that Saudi Arabian regulatory environment has typically enjoyed a more balanced and
structured approach than some GCC markets. Moreover, unlike some key markets in the region Saudi Arabia already
satisfies the WTOs requirement of three mobile operators.
Regulatory cost pressure easing, room for margin expansion as data revenue mix increase
Royalties/ Government charges are regulated by CITC for telecom operators in the Kingdom. Besides, license fee
and fee for usage of frequency spectrum, Saudi based operators are required to pay commercial service provisioning
fee to the regulator. CITC has a fee structure of 15% of net revenue (revenue less interconnection costs) for mobile
services, 10% of net revenue for landline services and 8% of net revenue for data services. While we do not expect
any changes to the fee structure in our forecast period, there exists room for moderating the same, especially in the
mobile services.
Royalty fee charges for telecom services in Saudi Arabia
Service Type
As a % of net revenue (revenue less interconnection costs)
Mobile services
15%
Landline services
10%
Data services
8%
Sources: CITC, company reports, Saudi Fransi Capital analysis

In fact for both STC and Mobily, the government charges (as % of sales) is witnessing a declining trend indicating
lower regulatory costs as a result of increasing mix of data revenue, where royalty fee is relatively lower. For STC
government charges (% of sales) have declined from 14% (in 2007) to 9.4% in 2012 while for Mobily it declined from
12.4% (in 2007) to 5.7% (in 2012).
Regulatory costs (as a % of sales) on a decline, a positive for margins

STCs government charges ( % of sales) (2007 2012)
16%
Mobilys government charges ( % of sales) (2007 2012)

14%
14.0%
14%
12.4% 12.6%
12%
11.7%
12%
11.2% 11.1% 11.3%
9.6%
10%
8.7%
9.4%
10%
7.8%
8%
8%
Room for margin expansion

exist through lower
government charges as data
revenue mix increases
5.7%
6%
6%
4%
4%
2%
2%
0%
0%
2007
2008
2009
2010
2011
2012
2007
2008
2009
2010
2011
2012

Government charges include : Royalty, license and frequency usage charges
Revenue include handset sales and others
Page 29
Strong balance sheet position; capital return prospects are high

While new international opportunities exist for Saudi telcos, in light of the ongoing regional tension, any investments
are likely to be highly selective. In fact, any international investments are likely to emanate from STC as we believe
other operators are restricted from expanding beyond Saudi, by their main stakeholders and license restrictions.
Following the global financial crisis and the Arab spring, companies focused on consolidating existing operations (STC
recently increased its stake in Axis, Indonesia to 80% from 51% earlier). The declining net debt/EBITDA in the sector
is, overall, a positive, in our view. The net debt-to-EBITDA has declined to 0.5x in 4Q 2012 from a high 2.8x for Mobily
in 2007, while for STC the ratio came down to 0.6x in 4Q 2012 from 1.2x historically. There could be a likely capital
return phase in the near term than chasing new growth avenues. We, thus, expect STC to balance out growth/returning
cash to shareholders. Furthermore, the current dividend yields are attractive for both STC and Mobily, though
moderately below peers in GCC/ MEA.
Saudi telcos are well capitalized

Net Debt EBITDA ratio ( 2007-4Q2012)
STC / Mobily dividend yield (%) vs GCC/ MEA peers
3.0
2.5
2.0
2.1
1.8
2.0
1.6
1.6
1.5
1.5
1.2
1.0
1.0
0.7
0.5
0.0
2007 2008 2009 2010 2011 Mar
12
STC
Mobily
Jun
12
Sep
12
Dec
12
Industry
MEA - Median
Maroc Telecom
MTN
Vodacom
Jordan Telecom
Qtel
Zain Kuwait
Omantel
Batelco
Du
Etisalat
Mobily
STC
6.2
7.7
4.8
5.1
6.9
2.6
7.4
7.0
9.6
5.6
6.2
6.2
5.1
0
10
12
Page 30
SAUDI TELECOM COMPANY
Rating Summary
STC: Investment Highlights

We initiate coverage on Saudi Telecom Company (7010/ STC AB) with a BUY rating and a TP of
SAR 51.1, implying an upside of 28% to the last close of SAR 39.9 per share. At 4.6x EV/EBITDA
ratio on 2013 estimates, STC is trading in line with GCC peers but at a 17% discount to MEA
comparables. While one-off charge in 4Q 2012 (in its International operations) and the recent
management changes are of concern, we see a misplaced risk perception on the counter not
crediting the attractive long-term growth prospects both in Saudi Arabia and international markets.
We forecast EPS 2013 of SAR 4.4, 8.5% higher YoY (ex-one off items). Assuming maintained
DPS, the implied dividend yield is 5.0%. However, we see upside potential on dividends as cash
continues to pile up.
We believe the company is well placed to benefit from the emerging trend of
mobile-fixed convergence in broadband services: STC dominates the Kingdoms
fixed line market (~90% share). The company has aggressively rolled out its high-speed
fixed line network across the Kingdom (300,000 km, ~10x Mobily) and enjoys a
competitive advantage over peers. STC is well placed to exploit the emerging
opportunity of broadband access via tablets/smartphones through both fixed lines (WiFi) and mobile. We expect STCs revenue to grow at a low single-digit average of 3.9%
YoY during 201217. We forecast 2013e top-line of SAR 60.7bn, 2.3% higher YoY.
65% from Saudi Arabia and 35% from international operations.
Pricing power in broadband; attractive opportunity in service bundling: STC
enjoys pricing power in high-speed broadband services through its Jood and VERVE
brand, an FTTH service with download speed up to 1000Mbps. While we are cautious
about competitor GO fast rolling out its services, we expect STC to maintain its
competitive advantage through bundled service offerings (InVision) and superior fixed
broadband speed, which is successfully adding new customers. STC added 100,000
new customers into its fiber optic network (home and business) in 4Q 2012, an increase
of more than 1000% over 4Q 2011. The company also achieved a 15% growth in
subscribers for the bundled services in 4Q 2012.
International diversification a long-term positive; currently overshadowed by
regional tension: Besides acquisition-led international presence (Oger and Maxis),
STC has made successful inroads into the saturated Kuwaiti and Bahraini markets
(capturing an estimated mobile share of 20% and 35%, respectively in 2011) through
green field operations, which is noteworthy. Yet we would like to stress that despite the
ongoing protests in Bahrain, Viva Bahrain saw revenues spike by some 166% and Viva
Kuwait 127% during the two years of 2011-2012 compared to 2010 and have turned
EBITDA positive. All in we forecast, a 5.6% yoy growth in STCs EBITDA in 2013 to
reach SAR 22.2bn. CAGR for our forecast period is 5.3%. We expect EBITDA margins
of 36.5% in 2013e, 127bps higher yoy.
Legacy PSTN networks to remain a drag on ROE; penetration of data services to
drive asset returns: The traditional PSTN network (14% of revenue) remains a
structural drag on the companys return profile (ROA of -0.8% in 2012 versus 6.4% for
the company). Consequently, we forecast STCs ROE to range in the high teens until
2017 driven by a high mix of data services, which are expected to account for nearly
26% of total revenue by 2014 compared to 23% in 2012. Near-term catalysts for the
stock include traction in FTTH services and potential value unlocking in tower assets.
STC
BUY
TARGET PRICE (SAR)
51.1
Upside/(Downside)
28.0%
Stock Details
Current Price*
SAR
39.9
Market Capitalization
SAR Mn
80,000
Shares Outstanding
Mn
2000
52-Week High
SAR
46.5
52-Week Low
SAR
35.8
-7.6
SAR
4.4
Price Change (YTD)

EPS 2013e
Beta (1 Year Adj.)
0.68
Ticker (Reuters/
Bloomberg)
7010.SE
STC AB
Price as of February 11, 2013
Key Shareholders
Public Investment Fund
70.0%
Public Pension Agency
6.6%
General Organization for Social

Insurance
7.0%
Publicly Held
16.4%
Source: Zawya
Price Multiples
Current
2013e
P/E(x)
10.9
9.0
EV/ EBITDA (x)
5.2
4.6
Dividend Yield (%)
5.0
5.0
STC vs. TASI

1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
STC
TASI
Source: Tadawul
Sector Coverage
Roy Cherry
+966-1-2826844
Page 31
FINANCIALS & RATIOS

Key Financials (in SAR mn)
2008
2009
2010
2011
2012
2013E
2014E
Revenue
47,469
50,780
51,787
55,662
59,372
60,722
62,659
EBITDA
21,743
20,612
19,621
20,025
20,945
22,191
23,132
EBIT
12,042
12,130
10,977
8,488
9,281
10,387
10,699
Net Profit
11,038
10,863
9,436
7,729
7,351
8,875
9,135
Current Assets
18,946
22,663
18,704
21,967
28,783
38,570
46,128
Property Plant and Equipment
44,382
52,737
55,127
55,085
56,005
56,972
56,957
Net intangible assets
31,695
29,222
31,837
29,318
28,162
26,843
25,585
Total Assets
99,762
109,587
110,781
111,402
117,912
127,512
133,970
Total Debt
36,321
36,109
33,697
33,598
34,823
37,526
38,360
Total Equity
42,562
50,833
53,464
54,082
58,969
64,543
69,467
Total Liabilities
99,762
109,587
110,781
111,402
117,912
127,512
133,970
21,149
15,956
21,185
16,488
12,106
23,682
23,749
(35,468)
(13,542)
(13,175)
(8,264)
(9,301)
(9,321)
(8,996)
14,763
(2,765)
(9,669)
(7,686)
(4,278)
(4,006)
(6,869)
Balance Sheet (in SARmn)
Cash Flow Statement

Net cash provided by operating activities
Cash flows from Investing Activities
Cash flows from Financing Activities
Key Ratio
2008
2009
2010
2011
2012
2013E
2014E
Gross margin (%)
62.4%
61.0%
58.6%
56.3%
56.6%
57.2%
57.6%
EBITDA margin (%)
45.8%
40.6%
37.9%
36.0%
35.3%
36.5%
36.9%
Revenue growth (%)
37.8%
7.0%
2.0%
7.5%
6.7%
2.3%
3.2%
Growth in EBITDA (%)
30.1%
-5.2%
-4.8%
2.1%
4.6%
5.9%
4.2%
Growth in earnings (%)
-8.2%
-1.6%
-13.1%
-18.1%
-4.9%
20.7%
2.9%
0.8
0.7
0.7
0.6
0.6
0.6
0.6
Capex/ Sales
34.3%
30.8%
21.9%
14.1%
14.8%
16.0%
15.0%
ROAA (%)
13.3%
10.7%
9.1%
7.1%
7.0%
7.8%
7.5%
ROAE(%)
16.9%
Debt/ Equity (x)
30.5%
28.0%
23.1%
17.2%
16.3%
17.8%
Cash flow yield (%)
6.1%
0.4%
12.3%
10.8%
4.2%
12.8%
14.1%
Per Share Ratios
2008
2009
2010
2011
2012
2013E
2014E
Earnings per share
5.5
5.4
4.7
3.9
3.7
4.4
4.6
Dividend per share
3.8
3.0
3.0
2.0
2.0
2.0
2.5
2008
2009
2010
2011
2012
2013E
2014E
P/Earnings
6.6
7.2
7.3
10.3
10.9
9.0
8.7
P/Book
2.2
2.1
1.9
1.7
1.6
1.4
1.3
EV/ EBITDA
5.5
5.2
5.7
5.6
5.2
4.6
4.2
P/Sales
2.3
1.7
1.6
1.4
1.3
1.3
1.3
Valuation Ratios

Page 32
Investment Thesis
STCs background: Leader among GCC telecoms
STC is a leader among GCC
telecoms; presence in more
than 10 countries and has
~160mn customer base.
Established in 1998, Saudi Telecom Company is the incumbent telecom operator in Saudi Arabia, offering services
across fixed, mobile, data and internet to both consumer and enterprise users. STC, which enjoyed monopoly in
Saudi Arabia until 2004, is now competing in the domestic market with new players that are backed by other leading
GCC operators such as Etisalat (Mobily), Zain (Zain KSA) in mobile and Batelco (Atheeb Telecom) in fixed lines.
STC has successfully diversified its business into other regional and international markets such as Turkey (Oger
Telecom), Kuwait and Bahrain (Viva operations) in the MEA region and Malaysia, Indonesia (Maxis) and India in Asia
(please see the companys timeline in Appendix A). STC is the largest telecom operator based out of GCC with a
customer base of ~160mn across 10 countries in MEA and Asia. STCs interests in various operations are detailed
below.
STC Company structure
Page 33
Well established network infrastructure; competitive advantage in fixed broadband

Infrastructure assets across
fixed, mobile and data
applications in both Saudi
and international markets
We have a positive outlook on STC considering the expected domestic market growth led by data segment demand
and its diversified and growing international business.
In our opinion, well-established telecom networks are a key competitive advantage for STC, which holds infrastructure
assets across fixed, mobile and data operations in both domestic and international markets. The company also
provides backbone infrastructure capacity for IP-based services to other operators. In addition, the company is now
positioned in the Saudi market as the only one-stop communication/entertainment shop. Besides a comparable mobile
offering, it has a dominant presence in fixed line that it is gradually being able to reposition and bring back to life as
value added in its bundled offers. The roll-out of IP-TV and FTTH internet with speeds reaching up to 200 Mb/sec is
also another first on this scale in the Kingdom.
The trend of fixed-mobile substitution in Saudi Arabia impacted STC the most. Nonetheless, the company remains the
market leader with an estimated share of 47% in mobile services and dominates the fixed line segment with its 97%
share. STCs high mix of postpaid customers (~2030% versus regional benchmark of 1015%) is a key positive. Until
2014, we expect the company to retain 46% market share in mobile operations as well as its leadership position in fixed
line (with 90% share).
Demand for broadband in the Kingdom has been mostly mobile based (in terms of subscribers, while traffic volumes
are predominantly over fixed lines), but we see an emerging global trend of mobile-fixed convergence in accessing the
Internet. STC is positioning itself through fiber roll-outs across Saudi Arabia (300,000 km of fiber, 10x Mobily/Bayanat).
Furthermore, STC is aggressively rolling out the fiber network to provide high-speed internet services (speed up to 200
Mb/sec) and aims to cover more than 1.5mn homes by 2014. Its fixed broadband subscribers grew 19% in 4Q 2012
compared to 4Q 2011.
We expect the company to make inroads in the mobile broadband segment, which is currently dominated by Mobily.
STC launched commercial 4G Long Term Evolution (LTE) mobile broadband networks in 2H 2011 and has presence in
over 38 cities. The company aims to achieve 4G mobile broadband network coverage of 95% of the population by
2014.
We forecast STCs revenues to reach SAR 60.7bn in FY 2013 and increase to SAR 62.7bn by 2014, (ex-accounting
change). Segment-wise, while mobile services remain the major revenue source, we see an increasing trend of data
contribution to the companys business mix. Data segment is expected to account for 31% of total business compared
to 23% in 2012.
Increasing contribution from Data segment

Revenue Breakup Segment (in SAR bn)
75
Revenue Breakup Segment (%)

100%
12% 14% 14% 17%
60
45
5.7
9.1
7.2
7.1
9.3 10.2
22.7
18.3 20.4
14.6 16.4
13.4
9.4
9.1 9.2
8.3 8.4 8.8 8.8 9.0
30
15
80%
19% 18% 20% 15%
23% 24% 26% 28%

30% 31%
14% 15%
14% 14%
13% 13%
60%
40%
37.9 38.0 37.6 38.3 39.3 40.2 41.2

32.6 34.1 34.2
69% 67% 66% 68% 64%

62% 61% 60% 58% 57%
20%
0%
-20%
GSM
PSTN
Data
Others
GSM
PSTN
Data
Others

Note: Based on current accounting method
Page 34
We forecast STCs mobile subscribers in Saudi Arabia to reach 25.9mn in 2013 and increase to 27mn by 2014, while
mobile ARPU are expected fall 4% annually to SAR 69 per month by 2014. In the fixed line segment, we expect a total
5.2mn lines in 2014 (Home + Residential), while blended ARPU are conservatively estimated to contract to SAR 138
per month by 2014.
Steady growth in mobile and fixed lines market
25
29.1 30.1
27.0 28.0
25.9
24.2 25.1 24.9
140
130
120
110
20
100
15
90
10
80
70
60
50
STC Subscribers
240
6
Subscribers(mn)
Subscribers (mn)
30
Fixed lines - Subscribers vs ARPU (2010-2017e)
150
35
4.5
4.8
5.2
5.0
5.3
5.5
5.7
Mobile segment - Subscribers vs ARPU (2010-2017e)
210
4.1
180
150
120
2
1
90
60
ARPU (RHS)
STC Subscribers
ARPU (RHS)

In the broadband market, we expect STC to make market share gains. Mobile broadband subscribers for STC are
forecast to reach 3.6mn in 2013 and increase to 4.5mn by 2014. In the fixed broadband segment, we expect STC to
continue its dominance with an estimated 2.6mn subscribers in 2014, while ARPUs are expected fall 4% annually to
SAR 88 per month by 2014.
Broadband market STC is well placed for growth, especially fixed broadband
150
6.6
Subscribers (mn)
7
5.5
2.3
90
2.8
80
2
1
120
100
3.6
130
110
4.5
70
0.3
STC Subscribers
3.5
3.2
3.0
140
3
Fixed broadband (mn)
7.8
Fixed broadband - Subscribers vs ARPU (2010-2017e)
2.5
2
1.7
2.4
2.8
140
130
120
1.9
110
100
1.5
90
80
70
60
0.5
50
ARPU (RHS)
2.2
2.6
150
Mobile broadband - Subscribers vs ARPU (2010-2017e)
60
50
STC Subcribers
ARPU (RHS)
Besides growth prospects within the Kingdom, we expect companys International markets to increase their contribution
to 40% by 2017 compared to 32% in 2012 (based on the current accounting method). In 2012, STC delivered a 40%
yoy growth revenue in its controlled subsidiaries (Viva Bahrain, Viva Kuwait and PT Axis - Indonesia) and added new
subscribers across post-paid, pre-paid and wireless broadband services.
Page 35
Increasing contribution of international revenues

Revenue Breakup Geography (in SAR bn)
Revenue Breakup Geography (%)
80
100%
70
60
50
40
3.8
11.1
3.9
11.2
10.4
4.8
4.4
4.6
10.6
10.9
11.5
41.0
41.9
4.2
5.1
12.2
5.3
80%
7%
7%
7%
7%
7%
7%
7%
22%
20%
18%
17%
17%
18%
18%
18%
68%
68%
68%
67%
66%
64%
62%
61%
13.0
60%
40%
30
20
7%
35.3
38.1
2010
2011
40.4
40.6
42.7
43.6
20%
10
0
0%
2012 2013E 2014E 2015E 2016E 2017E
Saudi Arabia
Gulf Digital Media Holding
Oger Telecom
STC Bahrain (Viva)

Kuwait Telecom (Viva)
PT Axis
2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Saudi Arabia
STC Bahrain (Viva)
Gulf Digital Media Holding Kuwait Telecom (Viva)
Oger Telecom
PT Axis

Note: Based on current accounting method
Due to increasing competition in the domestic telecom market, the company ventured internationally, chasing both
growth and business diversification. International operations contributed around 32% to STCs top line in 2012. The
company executed a strategy of adding a mix of both existing and green field operations. While stake purchase in Oger
(35%) and Maxis (65%) was into existing operations, STC won third mobile licenses in Kuwait (26% stake) and Bahrain
(100%) to commence green field operations.
International markets offer long-term growth for STC, but investor concerns exist
In anticipation of growing domestic competition, STC forayed into international markets as early as 2005 through its
stake purchases in Oger Telcom and Maxis in Southeast Asia. This was soon followed by regional expansions.
Despite near-term concerns

in Viva operations, STCs
international growth
prospects remain attractive
Page 36
While GCC telecom companies had mixed fortunes with their expansions, barring Etisalats successful venture in Saudi
Arabia (Mobily) and Q-tel operations in Oman and Kuwait, expansion by regional players has met significant
challenges. Zain had to exit Africa due to excessive leverage, while Etisalat could take impairment charges in PTCL
(Pakistan) and has recently announced stake sale in XL Asiata, Indonesia. Similar to other GCC telcos, STC leveraged
its balance sheet to chase international growth prospects for stakes in Maxis and Oger and licenses in Kuwait and
Bahrain.
What was a bumpy ride initially, has more recently begun to bring rewards to STC as some of these businesses start
gaining considerable traction and turn EBITDA positive (Bahrain & Kuwait). We also understand that both the Indian
and Indonesian operations are heading in the same direction in the next two years. Consequently, we see attractive
growth prospects for STCs international operations (which represented ~32% of total revenue in 2012) Oger, Maxis,
Kuwait and Bahrain. However, these are currently under looked by investors due to the ongoing tension in the region,
limited disclosure and consequently ability to assess and value. We highlight that unlike its GCC peers, STC is
relatively less exposed to regions that are undergoing a political crisis. However, we note investor concerns exist for
STCs Viva operations in Bahrain and to a much lesser degree Kuwait. Yet we would like to stress that despite the
ongoing protests in Bahrain, Viva Bahrain saw revenues spike by some 155% and Viva Kuwait 121% during the two
years of 2011-2012 compared to 2010 and have turned EBITDA positive. With regards to increased disclosure, we
understand that efforts are being undertaken to facilitate a more accurate understanding of the international business
at STC.
STC relatively less exposed to conflict regions than GCC peers, but risks exist
Com pany
STC
Batelco
Etisalat
Qtel
Zain
Algeria
Egypt
Sudan
Bahrain Jordan
Y
Y
Y
Iraq
Pakistan
Y
Y
Y
Y
Palestine Tunisia Yem en
Y
Y
Countries
1
3
3
4
4
STC has minimal exposure to Jordan through Cyberia (Oger Telecom)

However, STC has a minority shareholder status in most of its international operations, providing an opportunity to
further raise its stake in select regions. It is no secret that STC remains highly interested in upping its stake in Oger
Telecom and the dialog is likely ongoing. Such a move, would boost international contribution and present additional
growth prospects for the company. We note that STC has the first right of refusal on Oger.
Overall STC group has more than 123mn subscribers in its international network with a target population of 1.6bn and
average penetration of 127%. STCs international revenues are generated, in order of contribution, from the following
subsidiaries Oger Telecom (~18% of revenue, Turkey and South Africa), Binariang Holdings (~7% of revenue,
Malaysia and India), Viva operations (~5% of revenue, Kuwait and Bahrain) and PT Axis (~2% of revenue, Indonesia).
International market presence for STC

Pop. (mn)
Penetration (%)
Operator
Subscribers (mn)
Market
share
Fixed
74.7
81%
Turk Telekom
15.0
99%
Mobile
74.7
87%
Avea
12.8
20%
South Africa
50.6
127%
Cell C
12.8
20%
Malaysia
28.6
128%
Maxis
13.0
35%
Indonesia
241.0
98%
PT Axis
14.2
6%
Bahrain
1.1
150%
Viva Bahrain
0.6
35%
Kuwait
3.7
135%
Viva Kuwait
1.0
20%
India
1,206.9
74%
Aircel
53.6
6%
STC Group
1,606.6
127%
Market Summary
Turkey
123.0

Oger Telecom (35% stake) forms 18% of revenue
Presence in Turkey and South
Africa through stake in Oger;
making inroads in Mobile
segment
Page 37
In 2007, STC purchased 35% stake in Oger Telecom for USD 2.6bn. Oger holds telecom assets in Turkey (55% of
Turk Telekom) and South Africa (75% of Cell C, South Africas third largest mobile operator). In addition, the company
provides ISP services in Saudi Arabia, Lebanon and Jordan through Cyberia. Turk Telecom, through its 81.1% holding
in Avea, has diversified operations beyond traditional fixed line services (a market which is on the decline in Turkey).
Avea is the third largest mobile operator in Turkey with about 20% market share in 2011.
Leadership in fixed line/broadband; Avea holds ~20% share in mobile

Turkey Market Summary/Forecast (%)
Turkey
2008A
2009A
2010A
2011A
2012E
2013E
2014E
Population (mn)
71.1
72.1
73.0
74.7
74.9
75.8
76.7
Fixed Line Subscribers (mn)
17.5
16.5
16.2
15.2
14.9
14.7
14.6
Penetration Levels (%)
98%
91%
88%
81%
79%
77%
75%
ARPU (TRY)
23.9
21.1
22.2
21.9
22.2
21.1
20.9
Turk Telecom Subscribers (mn)
17.5
16.6
16.0
15.0
13.6
13.3
12.9
100%
100%
99%
99%
91%
90%
89%
5.7
6.5
7.1
7.6
8.8
10.2
11.6
32%
36%
39%
40%
47%
53%
60%
ARPU (TRY)
26.2
31.1
32.7
36.3
37.4
36.9
36.8
5.7
6.2
6.6
6.8
7.0
8.1
9.2
Turk Telecom Market Share (%)
99%
96%
93%
90%
79%
79%
80%
Mobile Subscribers (mn)
65.8
62.8
61.8
65.3
67.7
70.7
73.8
93%
87%
85%
87%
90%
93%
96%
ARPU (TRY)
14.6
18.0
19.2
20.5
22.4
21.3
21.1
Avea Subscribers (mn)
12.2
11.8
11.6
12.8
13.5
14.4
15.3
Avea Market Share (%)
19%
19%
19%
20%
20%
20%
21%
Turk Telcom Market Share (%)
Broadband Subscribers (mn)
Turk Telecom Subscribers (mn)
Sources: IMF, ITU, company reports, Saudi Fransi Capital analysis

Cell C has made steady inroads into a market dominated by telco majors such as MTN and Vodacom (a subsidiary of
UK-based Vodafone Group). The company holds around 20% market share in South Africa, offering services to
~12.8mn subscribers in 2011. In addition, Cell C runs a successful MVNO, Virgin Mobile, in the country through its 50%
holding in the company. MVNO trends are gaining traction in GCC markets, and STC would look to leverage its
expertise of MVNO operations through Oger Telecom.
Cell C fast establishing presence in South Africa

South Africa Market Summary/Forecast (%)
South Africa - Cell C
2008A
2009A
2010A
2011A
2012E
2013E
2014E
Population (mn)
48.9
49.5
50.0
50.6
51.2
51.8
52.4
45.0
46.4
50.4
64.0
67.6
71.3
75.1
92%
94%
101%
127%
132%
138%
143%
ARPU (USD)
18.0
18.0
18.0
18.0
17.9
17.7
17.6
Cell C Subscribers (mn)
3.6
5.6
8.1
12.8
13.5
14.9
16.3
Cell C Market Share (%)
8%
12%
16%
20%
20%
21%
22%
Page 38

Binariang (25% stake) contributes 7% to revenue
Increasing presence in
Malaysia and Indonesia; high
Muslim population provides
synergies during Hajj
STC entered the Asia-Pacific market through a USD3.0bn deal for 25% minority stake in Binariang, which owned 100%
interest in Maxis Telecom (Maxis) at that time. Following Maxis IPO, Binariangs stake came down to 65%. Maxis have
presence in Malaysia, Indonesia and India.
Malaysia a growth market for STC

Malaysian Market Summary/Forecast (%)
Malaysia - Maxis
2008A
2009A
2010A
2011A
2012E
2013E
2014E
Population (mn)
27.5
27.9
28.3
28.6
29.0
29.5
30.0
27.7
30.1
33.9
36.7
37.8
39.1
40.3
101%
108%
120%
128%
130%
132%
134%
56.0
56.0
50.0
52.0
49.9
45.1
44.2
9.8
10.7
12.0
13.0
13.5
14.0
14.6
35%
35%
35%
35%
36%
36%
36%

ARPU (MYR)
Maxis Subscribers (mn)

Maxis Market Share (%)

Viva operations contribute ~5% to revenue; Kuwait (26% stake) and Bahrain (100%)
Viva brand well established
in Kuwait and Bahrain
Through successful bids for third mobile licenses, STC entered the Kuwaiti and Bahraini markets in 2008 with its Viva
brand. Despite being well-penetrated mobile markets and dominated by regional majors such as Zain and Qtel (Kuwait)
and Batelco (Bahrain), Viva captured an estimated 20% share in Kuwait and 35% in Bahrain in 2011.
STC successfully penetrates GCC markets through Viva brand

Kuwaiti Market Summary/Forecast (%)
Kuwait - Viva
2008A
2009A
2010A
2011A
2012E
2013E
2014E
Population (mn)
3.4
3.5
3.6
3.7
3.8
3.9
4.0
2.8
2.9
3.9
5.0
5.2
5.4
5.6
81%
83%
108%
135%
136%
138%
140%
ARPU (USD)
69.0
55.0
52.0
33.0
32.7
31.9
31.7
Viva Subscribers (mn)
0.1
0.4
0.7
1.0
1.3
1.4
1.5
Viva Market Share (%)
4%
13%
18%
20%
25%
26%
27%
2008A
2009A
2010A
2011A
2012E
2013E
2014E
Population (mn)
0.8
1.0
1.1
1.1
1.2
1.2
1.2
1.4
1.4
1.6
1.7
1.8
1.9
2.0
Bahraini Market Summary/Forecast (%)

Bahrain - Viva
185%
135%
142%
150%
157%
163%
170%
ARPU (USD)
14.0
31.0
32.7
31.9
31.7
Viva Subscribers (mn)
0.5
0.6
0.6
0.7
0.8
0%
0%
30%
35%
36%
37%
38%
Viva Market Share (%)

Viva Bahrain saw revenues spike by some 166% and Viva Kuwait 127% during the two years of 2010-2012 and have
turned EBITDA positive.
Page 39

PT Axis (80.1% stake) accounts for less than 2% of revenue
Besides its presence in Asia through Binariang, STC made direct investments in the region and holds 80.1% stake in
PT Axis, an Indonesian mobile operator. PT Axis holds an estimated 5% market share in Indonesia, but offers
synergies to STCs operations in the form of the countrys large Muslim population base (~230mn plus) that travels
regularly to Saudi Arabia for the Hajj. In addition, STC is looking at potential value unlocking in tower assets through a
USD200mn deal.
Small presence, but synergistic market for STC

Indonesian Market Summary/Forecast (%)
Indonesia - PT Axis
2008A
2009A
2010A
2011A
2012E
2013E
2014E
Population (mn)
231.0
234.3
237.6
241.0
244.5
248.0
251.5
140.6
163.7
211.3
236.8
249.0
261.6
274.4
61%
70%
89%
98%
102%
105%
109%
ARPU (USD)
4.0
4.0
4.0
4.0
4.0
4.0
PT Axis Subscribers (mn)
3.3
9.5
14.2
16.6
19.2
22.0
0%
2%
5%
6%
7%
7%
8%
PT Axis Market Share (%)

Change in reporting method starting 1Q 2013
STC is adopting a new accounting policy effective January 2013. Currently, STC treats joint-venture projects using the
proportionate consolidation method according to IAS 31. Following the introduction of the International Accounting
Standards Boards IFRS 11 in place of IAS 31, STC would change its accounting method from proportionate
consolidation to the equity method. Oger Telecom (35%) and Binariang Holdings (25%) would be the major assets
impacting the accounting change. While revenue accounting will change, we highlight that there will be no impact at
Net income level. We will update our numbers once the new standard is fully adopted. For now, we have included a
pro-forma estimate of the companys financials (both Pre-equity method and Post-equity method). (See following table).
Pro forma estimates - STC

In SARmn
Revenue
Net Income
Total Assets
Total Liabilities
Pre-Equity
2012
Post-Equity
2012
Pre-Equity
2013e
Post-Equity
2013e
59,372
44,745
60,722
45,771
7,350
7,350
8,875
8,875
117,912
82,557
127,512
89,278
58,943
31,314
62,969
33,453

New international opportunities for STC Morocco, Algeria and Libya
Strong balance sheet
position of Saudi telcos;
could be frontrunner in
upcoming license/ stake
opportunities.
Page 40
Amid regional tension, there exist new opportunities, especially for STC. French group Vivendi announced plans to
offload its 53% stake in Maroc Telecom. Oman, Libya and Lebanon are considering new telecom licenses and Algeria
could potentially see the much delayed privatization of its incumbent Algerie Telecom. Considering the current low risk
appetite for the Middle East region among international investors, GCC-based telcos could well participate in these
opportunities with lesser risks of overpaying for assets. Outbidding for regional licenses and operator stakes has
negatively impacted operator returns in the past (including Zain KSA), and a similar scenario is less likely to be
repeated in the current geopolitical environment.
Maroc Telecom: All major regional telcos Qtel, Etisalat and MTN South Africa could be serious competitors for this
stake. However, we highlight that STC has not indicated a recent interest in this stake. The company had showed
interest to enter into Meditel (Moroccos second-biggest player) back in 2009. The Maroc Telecom stake is estimated to
1
be worth USD 7.1bn (~SAR 26bn ).
Margin outlook positive

Data services reverse
downtrend in EBITDA margin
STCs EBITDA margins contracted significantly following its international foray amid competitive pressure in the
domestic market. We expect the companys ARPU to contact 34% over our forecast period (through to 2017e).
However, increasing contribution from data services, expected pricing power in FTTH and bundled services (InVision
and IP TV) coupled with improving returns for the international business should translate into higher EBITDA margins
for the company. STCs subscribers in bundled services increased 15% yoy during 4Q 2012. We expect margins to
recover to the 38% level by 2017.
Positive EBITDA outlook

EBITDA outlook 2008-14e (in SAR bn)
EBITDA margin outlook 2008-14e (%)
(excluding one-offs)
25
21.7
20
20.6
19.6
20.0
20.9
50%
22.1
45.8%
23.0
45%
40.6%
40%
37.9%
15
36.0% 35.3% 36.5%
36.9%
35%
10
30%
5
25%
0
2008 2009 2010 2011 2012 2013E 2014E

2008 2009 2010 2011 2012 2013E 2014E
Improving core operating environment to drive earnings

Improving operating environment and a positive margin outlook are expected to translate into earnings growth of 19%
for STC in 2013. We forecast that the companys net income in 2013 would be SAR 8.8bn. This translates into an EPS
of SAR 4.4 (a conservative estimate, 2% below consensus). Foreign currency fluctuations have negatively impacted
earnings in the past, and we advise caution considering STCs increasing exposure to international markets. However,
we expect net income margins to expand to 15-16% levels over the long term (forecast period through 2017e). In fact,
excluding one-off items (Foreign exchange/ impairment charges)
Estimated value for 53% stake in Maroc Telecom as on December 26, 2012, based on South Korea based KT Corps
bid.
Page 41

Positive outlook on earnings front
EPS outlook 2008-14e (in SAR)
Net income margin forecast 2008-14e (%)

25%
23.3%
21.4%
5.5
5.4
20%
4.7
4.4
3.9
18.2%
4.5
14.5% 14.5%
13.9%
15%
3.7
12.4%
10%
2
5%
1
0%
0
2008
2008
2009
2010
2011
2009
2010
2011
2012 2013E 2014E
2012 2013E 2014E
Excluding one-offs
Net Income outlook 2008-14e (in SAR bn)
14
12
Net income margin forecast 2008-14e (%)

30%
12.9
27.1%
25%
10.3
10
8.1
8.7
8.2
8.9
20.4%
9.1
20%
15.7% 15.7%
8
15%
13.8% 14.6% 14.6%
6
10%
5%
2
0
0%
2008 2009 2010 2011 2012 2013E 2014E
2008 2009 2010 2011 2012 2013E 2014E
Page 42

Legacy PSTN a drag on STCs returns
Strong balance sheet;
potential to scout new
market opportunities,
especially Morocco
STCs legacy PSTN operations remain a drag on ROA. These operations contribute 14% to revenue, but are lossmaking with an ROA of -0.8% in 2012 versus 6.4% for the company. Nonetheless, we forecast STCs ROE to range in
the high teens until 2017 driven by a high mix of data services (ROA of 49.2% in 2012). Revenues from data services
are expected to account for nearly 30% of the total by 2017 compared with 17% in 2011.
PSTN network a drag on ROAs; Rising share of Data to drive ROEs

Segment wise ROA (%)
RoE Outlook 2008-14e(%)
60%
35%
49.2%
30.5%
50%
39.2%
40%
30%
28.0%
30%
23.1%
25%
22.6%
17.2% 16.3% 17.8% 17.3%
20%
20%
10%
15%
10.4%
8.7%
6.4%
10%
0%
5%
-1.3% -0.8%
-10%
GSM
2009
PSTN
2010
Data
2011
Total
2012
0%
2008
2009
2010
2011
2012 2013E 2014E
Page 43

Capex program mostly behind for STC
STC has introduced 4G Long Term Evolution (LTE) mobile broadband services in over 38 cities and is targeting to
cover 95% of the population by 2014. Given the completion of a majority of network rollouts (fiber network in the
Kingdom), we expect the capex-sales ratio to be at 15-16% levels till 2014. This ratio is projected to decrease to 13%
over the long term.
Capex program to continue until 2014

Capex outlook 2008-14e (in SAR bn)
18
16.3
16
Capex-Sales 2008-14e (%)

40%
15.6
35%
14
34.3%
30.8%
11.4
12
10
30%
7.8
8.8
9.7
9.4
25%
8
6
21.9%
20%
14.1% 14.8%
15%
2
0
16.0%
15.0%
10%
2008 2009 2010 2011 2012 2013E 2014E
2008 2009 2010 2011 2012 2013E 2014E
With majority of STCs capex program behind, we expect STC to generate free cash flows of SAR10-14bn annually in
our forecast period. At current prices, STC offers a superior free cash flow yield of 12.8% on 2013 estimates.
Attractive free cash flow yield for STC

Free cash flow outlook 2013-17e (in SAR bn)
16
12
Free cash flow yield 2013-17e (%)

20%
14.4
11.3
12.0
12.8
18.0%
18%
16%
14%
10.2
14.1%
15.1%
16.0%
12.8%
12%
10%
8%
6%
4%
2%
0
0%
2013E
2014E
2015E
2016E
2017E
2013E
2014E
2015E
2016E
2017E
Strong balance sheet to support dividends

STC has a strong balance sheet with SAR 5.1bn in cash as of 4Q 2012 and SAR 8.7bn in Short term investments. The
company offers an attractive dividend yield of 4.8% at the current market price. At a DPS of SAR 2.0 per share, the
payout ratio of 45% for 2013e is currently lower than the average of 62% during 200810. Although neither the
management nor the Board of Directors have hinted at an increase, given the absence of new acquisitions or stake
increases, we believe that an increase in payout is bound to happen sooner or later. Cash has been piling up, and net
cash per share stood at SAR 6.9 at the end of 4Q 2012, a YoY increase of 53%.
Page 44

Our forecast vs. consensus
Our forecasts are conservative compared to Bloomberg consensus estimates. For 2013, we forecast revenue of
SAR60.7bn, 3.2% lower to consensus while our earnings forecast is 2.0% lower. However, we see STC sustaining
higher EBITDA margins (than consensus) going forward reflecting our view of a higher business mix from data
services.
Conservative forecast compared to consensus

Forecast
2013e
2014e
Revenue (SAR mn)
Saudi
Fransi
Capital
60,722
62,700
-3.2%
Saudi
Fransi
Capital
62,659
EBITDA ( SAR mn)
22,191
22,518
-1.5%
23,132
23,386
-1.1%
EBITDA margin (%)
36.5%
35.9%
63bps
36.9%
35.8%
112bps
4.4
4.5
-2.0%
4.6
5.3
-14.3%
EPS (SAR per share)
Consensus
Difference
(%)
Consensus
Difference
(%)
65,322
-4.1%
*Consensus forecast as of February 11, 2013

4Q 2012 results: One-off charges impact bottom line

STCs earnings surprisingly declined 80% in 4Q 2012. The company reported one-time non-recurring, non-cash
charges of SAR 1.2bn in its International operations. The bottom line was impacted by the SAR 641mn charge related
to the revaluation of investments fair value in Cell C (South Africa) and Aircel (India). In addition, STC shared a one-off
charge of SAR 544mn in Binariang Holdings which led to a deferred tax charge for its investments in Aircel, India.
However, excluding these charges, the companys net income grew 10.2% YoY in 2012.
Results snapshot 4Q and FY2012

4Q 2011
4Q 2012
Difference
(%)
2011
2012
Difference
(%)
15,249
14,993
-1.7%
55,662
59,372
6.7%
Gross profit
7,935
8,144
2.6%
31,328
33,597
7.2%
Operating income
2,814
1,900
-32.5%
11,171
11,252
0.7%
EBITDA
5,021
4,307
-14.2%
20,025
20,305
1.4%
Net income
2,278
468
-79.5%
7,729
7,350
-4.9%
In SAR mn
Revenue
In a worst case scenario, STC could take upto 32% knock on earnings
Considering the uncertainty over one-off charges in STCs international operations, we look at potential scenarios to
assess the impairment risks attached to some of its key international assets Binariang, Oger and PT Axis. Our
analysis indicates a potential 32% knock on 2013 earnings at a worse case scenario (100% impairment of the goodwill
recorded for these investments). On a per share basis this translates to SAR 1.4 per share negative impact for STC.
Scenario: Impact on earnings resulting from one-off impairment charges

Binariang
Holdings
Oger
Telecom
PT Axis
Total Impact
On 2013 Earnings
Per Share Impact

(SAR)
100%
-19.8%
-7.2%
-4.6%
-31.5%
1.40
80%
-15.8%
-5.7%
-3.7%
-25.2%
1.12
60%
-11.9%
-4.3%
-2.7%
-18.9%
0.84
40%
-7.9%
-2.9%
-1.8%
-12.6%
0.56
20%
-4.0%
-1.4%
-0.9%
-6.3%
0.28
Goodwill Impairment
Charge (%)
Page 45
Valuation
We arrive at a fair value of SAR 51.1 per share for STC
Mispricing of STCs stock; a
buying opportunity
We have valued STC using the Weighted Average approach. The methods used include Discounted Cash Flow (DCF)
Sum-of-the-parts and relative valuation. We assigned higher weight to DCF approach, and arrived at a target price of
SAR 51.1 per share for STC, indicating a 28% upside from current levels.
Valuation summary of STC

Fair Value
Weights
DCF Valuation
SAR 58.8
40.0%
EV/EBITDA
SAR 47.6
20.0%
Fair P/E Multiple
SAR 44.1
20.0%
Sum-of-the-parts (SOTP)
SAR 45.9
20.0%
Weighted Average Fair Value
SAR 51.1
Upside/(Downside) from current market price %
28.0%
Valuation - Scenario Analysis

Base Case
Mobile penetration rate in Saudi Arabia

expected to reach 210% by 2017e
Fair Value estimate at different scenarios

65
SAR 59.3
STC to retain 45% market share in mobile

and 90% in fixed line and fixed
broadband
Price-based competition to dent ARPU by

4% yoy
Capex-sale to moderate to 13% over the

long term
60
55
SAR 50.8
50
SAR 46.7
45
Bull Case
40
35
30
Jan-12
Apr-12
Jul-12
Bull Case
Oct-12
Base Case
Jan-13
Fair Value
Bear Case
Initiating coverage with a BUY rating

Overall, we find STC shares attractive at current levels;
upside potential of 28%
STC shares offer a good margin of safety; limited
downside
Mobile penetration rate in Saudi Arabia to

reach 230% by 2017e
STC to increase market share in mobile

to 48% and retain 90% in fixed line and
fixed broadband
Operators to focus more on service

differentiation
beyond
price-based
competition; ARPU down 1% yoy
Capex-sale to moderate to 12% over the

long term
Bear Case
Little room for increase in mobile

penetration rate in Saudi Arabia; to touch
195% by 2017e
STC unable to maintain market position in

mobile and fixed line services ( down to
40%/ 85% respectively)
Aggressive price-based competition to

significantly hurt ARPU; down 5% yoy
Evolving technological changes push

STC to continue at higher capex levels
Sources: Bloomberg; Saudi Fransi Capital analysis
Page 46

Discounted Cash Flow (DCF)
Our DCF model is based on a five-year explicit forecast period until 2017. We arrived at a WACC of 11.1% for STC,
slightly higher than what we used for Mobily. In terms of terminal growth, we applied a 2.5% terminal growth rate to
estimate the terminal value. With this terminal growth rate being in line with what we used for Mobily, we believe it to be
on the conservative side specifically given STCs presence in several potentially high growth international markets. Our
DCF approach yields a fair value of SAR 58.8/share.
STC: Discounted cash flow valuation summary

In SAR mn
2013e
2014e
2015e
2016e
2017e
EBIT * (1-t)
11,189
11,502
12,158
12,881
13,692
Add: Depreciation and Amortization
10,069
10,671
11,254
11,847
12,450
Less: Minority interests
(699)
(727)
(756)
(786)
(817)
Changes in Working capital
(642)
(781)
(1,142)
(1,548)
(1,615)
Capital expenditure
(9,716)
(9,399)
(9,501)
(9,597)
(9,333)
Free Cash flow to Equity
10,201
11,267
12,014
12,798
14,376
9,305
9,263
8,902
8,544
8,651
Present Value of the free cash flow
174,378
Terminal Value
PV of future cash flows
44,666
PV of terminal value
104,936
Total Enterprise Value
149,601
Add: Cash & Equivalents
13,792
Less: Debt
34,823
Less: Minority Interest

Less: Other liabilities
Equity Value
Number of shares (mn)
Fair value per share
Upside/(Downside) %
7,575
3,449
117,547
2,000
SAR 58.8
47.3%
Fair Price-Earnings (P/E) multiple approach

We use a Fair P/E multiple approach using the formula (RoE-g)/(RoE*(Ke-g)), which in our view best captures the
risk/return and growth prospects of the company. We arrive at a Fair P/E multiple of 10x for STC, a 1% discount to
MEA 2013 median P/E multiple based on a ROE assumption of 15.9%, growth of 2.5% and a discount rate of 11%. Our
Fair value estimate using P/E approach is SAR 44.1 per share derived by applying a 10x P/E multiple to 2013 earnings
forecast of SAR 4.4 per share.
Page 47

Relative valuation
For STCs market approachbased relative valuation, we used EV/EBITDA multiples, which we believe is the most
suited for valuing STC. We selected a peer group of telcos operating within the GCC region and operators based
outside of the GCC but with operations in the MENA region (MTN, Vodacom, and Maroc Telecom). Our comparative
valuation is summarized in the following table. We expect STCs multiples to trade in line with the median valuation
multiples of its peer group.
Relative Valuation
Market
Cap (USD
mn)
Company
Price/Earnings (x)
EV/ EBITDA (x)
2012e
2013e
2014e
2012e
2013e
2014e
10.7
9.0
8.7
5.1
4.6
4.2
15,349
7.6
9.0
8.5
6.1
6.9
6.5
20,944
10.1
9.9
9.6
4.3
4.1
4.0
Du
4,493
9.9
9.5
9.5
4.1
3.6
3.3
Batelco
1,589
7.8
8.3
6.9
5.1
4.9
4.5
Omantel
2,770
8.9
8.5
8.3
4.8
4.7
4.6
Zain Kuwait
12,215
11.6
11.6
10.8
6.7
6.7
6.5
Qtel
10,153
11.4
9.0
8.4
4.6
4.4
4.2
Saudi Telecom
21,282
Etihad Etisalat
Etisalat
Jordan Telecom
1,887
14.5
13.4
12.7
6.7
6.5
6.3
Turkcell
14,000
12.3
11.3
10.6
6.8
6.2
5.6
Vodacom
19,460
16.2
13.9
13.1
8.1
7.4
6.9
MTN
37,619
15.1
13.3
12.1
5.8
5.6
5.2
Maroc Telecom
10,961
12.7
12.5
12.7
6.5
6.6
6.6
Median Multiple for Saudi

Arabia (Ex- Zain KSA)
9.1
9.0
8.6
5.6
5.8
5.3
Median Multiple for GCC
10.0
9.0
8.6
4.9
4.7
4.4
Median Multiple for MEA
11.4
9.9
9.6
5.8
5.6
5.2

Note: Relative valuation based on closing prices as of February 11, 2013
EV/EBITDA approach: We apply MEA peer EV/EBITDA to reflect the companys risk/return and growth prospects. This
however is conservative as STC offers international growth opportunity, especially in fast growing Asia region, while it
remains less exposed (relatively) to conflict regions in the Middle East. Our Fair value estimate using EV/EBITDA
approach is SAR 47.6 per share derived by applying a 5.6x EV/EBITDA to 2013 EBITDA forecast of SAR 22.2bn and
deducting net debt, minority interests and liabilities of SAR 32.1bn.
Page 48

Sum-Of-The-Parts (SOTP)
We have also valued STC on a sum-of-the-parts (SOTP) basis. We considered each operation and arrived at an
EV/EBITDA-based approach value for individual assets. We applied EV/EBITDA multiples for each region into the
forecasted EBITDA (for unlisted entities Cell C, Viva operations in Kuwait and Bahrain, Axis, Aircel and other assets
of STC) and on consensus estimates (for listed entities Maxis and Turk Telecom). We arrived at an SOTP value of
SAR 45.9 per share for STC.
STC: Sum of the Parts Value

Effective
interest (%)
of STC
shareholder
Entity
STC - Saudi Arabia
Type
100%
EV/
EBITDA
multiple
EBITDA
2013e
5.6
17,268
Currency
Enterprise
Value
(in SAR
mn)
Share
to
group
(%)
SAR
96,330
77.8%
Oger Telecom
Turk Telecom
19%
Listed
5.6
5,308
TRY
11,930
9.6%
Cell C
26%
Unlisted
6.5
227
USD
1,444
1.2%
Kuwait
26%
Unlisted
4.7
137
USD
626
0.5%
Bahrain
100%
Unlisted
4.7
69
USD
1,204
1.0%
Maxis
16%
Listed
7.6
4,526
MY
6,730
5.4%
Aircel
19%
Unlisted
7.6
198
USD
1,046
0.8%
84%
Unlisted
7.6
139
USD
3,311
2.7%
Unlisted
4.7
247
SAR
1,154
0.9%
123,775
100%
Viva
Binariang
Axis Indonesia
Other Assets
Total
Enterprise Value
123,775
Add: Cash
13,792
Less: Debt
34,823
Less: Minority
Interests
Equity Value
Number of shares
(mn)
Upside/(Downside) %
Exchange rates used
7,575
3,449
91,721
2,000
SAR 45.9
14.9%
USD:SAR: 3.75 ; Turkish Lira TRY:SAR: 2.11; Malaysian Ringgit MYR:SAR:1.20
Page 49
FINANCIALS INCOME STATEMENT

Income Statement (in SAR mn)
2008
2009
2010
2011
2012
2013E
2014E
47,469
50,780
51,787
55,662
59,372
60,722
62,659
(17,837)
(19,779)
(21,464)
(24,334)
(25,775)
(25,983)
(26,578)
29,633
31,001
30,323
31,328
33,597
34,739
36,080
62.4%
61.0%
58.6%
56.3%
56.6%
57.2%
57.6%
Selling & marketing expenses
(2,128)
(6,866)
(7,083)
(7,424)
(8,489)
(8,290)
(8,554)
General & administrative expenses
(5,762)
(3,522)
(3,619)
(3,879)
(4,162)
(4,258)
(4,394)
Depreciation & amortization
(6,408)
(7,799)
(8,642)
(8,854)
(9,053)
(10,069)
(10,671)
Revenue from services

Cost of services
Gross Profit
Gross profit margin (%)
Impairment provisions
(641)
(14,297)
(18,187)
(19,344)
(20,157)
(22,345)
(22,616)
(23,619)
Operating Income
15,335
12,814
10,978
11,171
11,252
12,122
12,461
EBITDA ( Ex-One Off)
21,743
20,612
19,621
20,025
20,945
22,191
23,132
45.8%
40.6%
37.9%
36.0%
35.3%
36.5%
36.9%
(675)
(811)
(606)
(414)
(313)
(319)
(325)
(1,432)
(1,385)
(1,781)
(2,238)
(2,503)
(2,548)
(2,599)
459
Total Operating Expenses
EBITDA margin (%) (Ex-One off)

Cost of early retirement program
Finance costs
Commissions and interest
624
362
309
450
366
450
Other Income
(1,809)
1,151
2,076
(481)
478
682
703
Other income and expenses, net
(3,293)
(683)
(1)
(2,683)
(1,971)
(1,736)
(1,762)
Income before Zakat
12,042
12,130
10,977
8,488
9,281
10,387
10,699
Zakat
(376)
( 335)
(118)
(118)
(247)
(286)
(294)
Provision for tax
(457)
( 642)
(820)
(479)
(1,011)
(527)
(543)
11,210
11,154
10,039
7,891
8,023
9,574
9,862
Net Income
Non-controlling interests
(172)
(290)
(602)
(163)
(672)
(699)
(727)
Net Income for the year
11,038
10,863
9,436
7,729
7,351
8,875
9,135
Basic EPS on net income
5.5
5.4
4.7
3.9
3.7
4.4
4.6
DPS
No: of shares
3.8
3.0
3.0
2.0
2.0
2.0
2.5
2,000
2,000
2,000
2,000
2,000
2,000
2,000
Page 50
FINANCIALS - BALANCE SHEET

Balance sheet (in SAR mn)
2008
2009
2010
2011
2012
2013E
2014E
Cash and cash equivalents
8,061
7,710
6,051
6,589
5,115
13,936
21,819
Short term investments
385
2,446
8,677
8,677
8,677
Accounts receivable, net
8,120
11,461
8,707
8,755
9,890
10,624
10,128
Prepayment and other current assets
2,765
3,492
3,561
4,177
5,101
5,333
5,503
18,946
22,663
18,704
21,967
28,783
38,570
46,128
2,452
2,533
2,540
2,682
2,732
2,786
2,842
Property, plant and equipment, net
44,382
52,737
55,127
55,085
56,005
56,972
56,957
Intangible assets, net
31,695
29,222
31,837
29,318
28,162
26,843
25,585
2,287
2,433
2,572
2,349
2,230
2,341
2,458
Total Non Current Assets
80,816
86,924
92,077
89,435
89,128
88,942
87,842
Total Assets
99,762
109,587
110,781
111,402
117,912
127,512
133,970
Accounts payable
6,649
7,657
7,036
5,190
6,569
6,868
7,087
Other credit balances - current
4,335
4,819
3,509
3,667
3,987
4,149
4,315
Accrued expenses
5,762
6,205
6,058
8,576
7,785
8,139
8,412
Deferred revenues - current portion
2,248
2,081
1,568
1,858
2,185
2,229
2,273
Murabahas and loans - current portion
3,905
8,579
8,447
5,972
4,712
5,100
5,202
Total Current liabilities
22,899
29,341
26,618
25,263
25,237
26,485
27,289
Murabaha and loans - non current

portion
28,081
22,711
21,741
23,960
26,124
28,277
28,843
2,738
2,844
2,995
3,062
3,449
3,733
3,808
Total Current Assets

Investments in equity & others
Other non-current assets
LIABILITIES & EQUITY
Provisions for end of service benefits

Other payables - non current portion
3,482
3,859
5,962
5,035
4,133
4,474
4,563
Total Non Current Liabilities
34,301
29,414
30,698
32,056
33,706
36,484
37,214
Share capital
20,000
20,000
20,000
20,000
20,000
20,000
20,000
Statutory reserve
8,233
9,299
10,000
10,000
10,000
10,000
10,000
Retained earnings
9,783
13,552
16,287
19,516
22,866
27,742
31,940
(1,269)
(1,133)
(671)
(671)
(671)
(378)
(816)
(22)
(1,474)
(801)
(801)
(801)
37,638
42,035
44,996
46,908
51,394
56,269
60,467
4,924
8,798
8,468
7,174
7,575
8,274
9,000
99,762
109,587
110,781
111,402
117,912
127,512
133,970
Other reserves
Financial statements' translation
differences
Total Shareholders' equity
Non-controlling interests
Total liabilities and equity
Page 51
FINANCIALS CASH FLOW

Cash flow statement (in SAR mn)
2008
2009
2010
2011
2012
2013E
2014E
21,149
15,956
21,185
16,488
12,106
23,682
23,749
(35,468)
(13,542)
(13,175)
(8,264)
(9,301)
(9,321)
(8,996)
14,763
(2,765)
(9,669)
(7,686)
(4,278)
(4,006)
(6,869)
443
(351)
(1,659)
538
(1,473)
10,356
7,883
Cash & cash equivalents at the

beginning of the period
7,618
8,061
7,710
6,051
6,589
5,115
13,936
Cash & cash equivalents at the end of

the period
8,061
7,710
6,051
6,589
5,115
13,936
21,819

Net cash flows from investing activities
Net cash generated from financing
activities
Net increase/ decrease in cash and cash
equivalents
Page 52
ETIHAD ETISALAT COMPANY
Mobily: Investment Highlights

We initiate coverage on Mobily (7020/ EEC AB) with a HOLD rating and a TP of SAR 80.6,
implying an upside of 7.8% to the last close of SAR 74.8 per share. At 6.9x EV/EBITDA on 2013
estimates, Mobily is trading at a premium to GCC and MEA peers. Mobily has created strong
market presence in Saudi Arabia, and it is poised to benefit from the growing demand for
broadband in the Kingdom. It has aggressively rolled out mobile networks across Saudi Arabia
and is gaining on market leader STC. We forecast EPS 2013 of SAR 8.3, an earnings growth of
6.4% YoY. Assuming maintained DPS (at SAR 1.15 per share), the implied dividend yield of
6.2% makes the counter attractive to hold.
Mobily leads fast-growing mobile broadband market in Saudi Arabia: Mobily

currently holds an estimated 40% share in Saudi Arabias mobile market in terms of
subscribers; additionally, it is the leader in the mobile broadband market with more
than 8.7mn subscribers (estimated ~70% market share). Apart from tapping the mobile
broadband opportunity, Mobily is positioning itself as a provider of fixed broadband
services through the purchase of Bayanat. This would enable the company to compete
more effectively with STCs bundled service offerings. Revenues from the fiber optic
and 4G networks grew more than 70% YoY. Overall, we expect Mobilys revenue to
grow at a CAGR of 5.4% during 201217. We forecast 2013e top-line of SAR25.6bn,
8.1% higher YoY.
Increasing contribution from data services; EBITDA outlook positive: Mobily is
capitalizing on the rising broadband penetration trend in the Kingdom. High ARPU
data services accounted for 30% of the companys revenues in 4Q 2012 which is
expected to reach 34% by 2014. Increasing contribution from data services and
anticipated pricing power through 4G services could translate into higher EBITDA
margins for Mobily. We expect a 7.9% yoy growth in Mobilys EBITDA in 2013 to reach
SAR 9.3bn. CAGR for our forecast period is 6.7%.
Managements track record and superior ROE warrant sector premium: Mobily
operates at an industry leading ROE (~30% in 2011), second only to Maroc/Vodacom
from among the leading Middle East and Africa (MEA) telcos. Considering the
greenfield operations of the company (unlike the incumbent advantage enjoyed by
Maroc/Vodacom), the managements track record of delivering profitable growth at
high ROEs is notable. Mobily warrants a premium to its peers, in our view. We
forecast Mobilys ROE to average 25.4% in our forecast period till 2017.
Shares fully priced with limited upside potential: While the ongoing business
momentum is a positive for Mobily, we see Mobilys shares fully priced at current
levels. Mobily is rewarding its shareholders through a bonus issue (1:10), which was
recently approved by the board. Mobily also announced a dividend of SAR 1.15 per
share in 4Q 2012, taking its total dividend distribution in 2012 to SAR 2.99bn. Mobilys
shares have outperformed TASI owing to the formers ongoing business momentum
and are expected to command a premium valuation.
Rating Summary
MOBILY
HOLD
TARGET PRICE (SAR)
80.6
Upside/(Downside)
7.8%
Stock Details
Current Price*
Market Capitalization
SAR
74.8
SAR Mn
57, 580
Shares Outstanding
Mn
770
52-Week High
SAR
75.5
52-Week Low
SAR
53.0
8.2
EPS (2013e)
SAR
8.3
Beta (1 Year Adj.)
0.80
Reuters Code /
Bloomberg Symbol
7020.SE
Price Change (YTD)
EEC AB
*Price as of February 11, 2013

Key Shareholders
Etisalat
27.5%
GOSI
11.4%
Other Saudi Investors and Public
61.1%
Sources: Company reports, Zawya
Price Multiples
Current
2013e
P/E(x)
9.6
9.0
EV/EBIDTA (x)
7.5
6.9
Dividend Yield (%)
5.2
6.2
Mobily vs. TASI

2.5
2.0
1.5
1.0
Jul-12
Jan-13
Jul-11
Jan-12
Jul-10
Jan-11
Jul-09
Mobily
Jan-10
Jul-08
Jan-09
Jul-07
Jan-08
Jan-07
0.5
TASI
Source: Tadawul
Sector Coverage
Roy Cherry
+966-1-2826844
Refer to important terms or use, disclaimers and disclosures on back page.
ETIHAD ETISALAT
FINANCIALS & RATIOS

Key Financials ( in SAR mn)
2008
2009
2010
2011
2012
2013E
2014E
Revenue
10,795
13,058
16,013
20,052
23,642
25,553
26,461
EBITDA
3,794
4,837
6,165
7,454
8,591
9,267
9,660
EBIT
2,099
3,045
4,279
5,138
6,088
6,497
6,893
Net Profit
2,092
3,014
4,211
5,083
6,018
6,406
6,797
Balance Sheet (in SAR mn)

Current Assets
6,621
8,577
9,415
9,893
10,427
12,608
14,868
Property Plant and Equipment
8,117
10,370
12,457
16,412
17,255
19,646
21,818
Net intangible assets
10,923
10,450
10,028
9,665
9,412
8,833
8,252
Total Assets
27,192
30,926
33,430
37,501
38,623
42,617
46,468
9,790
8,595
7,972
7,073
8,258
9,039
9,468
Total Debt
Total Equity
Total Liabilities
9,754
12,243
15,580
18,388
20,906
23,769
26,808
27,192
30,926
33,430
37,501
38,623
42,617
46,468
3,546
4,246
5,470
6,673
7,037
8,833
9,332
Cash Flow Statement

Cash flows from Investing Activities
(5,571)
(2,889)
(3,227)
(3,408)
(5,086)
(4,465)
(4,234)
Cash flows from Financing Activities
2,586
(1,687)
(1,516)
(3,237)
(2,338)
(2,761)
(3,329)
Key Ratio
2008
2009
2010
2011
2012
2013E
2014E
Gross margin (%)
55.8%
57.8%
54.9%
51.5%
50.9%
50.9%
51.1%
EBITDA margin (%)
35.1%
37.0%
38.5%
37.2%
36.3%
36.3%
36.5%
Revenue growth (%)
27.9%
21.0%
22.6%
25.2%
17.9%
8.1%
3.6%
Growth in EBITDA (%)
28.7%
27.5%
27.5%
20.9%
15.2%
7.9%
4.2%
Growth in earnings (%)
51.6%
44.1%
39.7%
20.7%
18.4%
6.4%
6.1%
1.0
0.7
0.5
0.4
0.4
0.4
0.4
27.4%
25.2%
20.5%
18.5%
20.6%
17.5%
16.0%
ROAA (%)
8.9%
10.4%
13.1%
14.3%
15.8%
15.8%
15.3%
ROAE(%)
26.7%
27.4%
30.3%
29.9%
30.6%
28.7%
26.9%
1.0%
1.7%
3.8%
5.2%
3.8%
7.3%
8.6%
Earnings per share
2.7
3.9
5.5
6.6
7.8
8.3
8.8
Dividend per share
0.7
1.1
1.8
3.0
3.9
4.6
4.9
27.5
19.1
13.7
11.3
9.6
9.0
8.5
5.9
4.7
3.7
3.1
2.8
2.4
2.1
17.4
13.5
10.4
8.4
7.5
6.9
6.5
5.3
4.4
3.6
2.9
2.4
2.3
2.2
Debt/ Equity (x)

Capex/ Sales
Cash Flow Yield (%)

Per Share Ratios
Valuation Ratios
P/Earnings
P/Book
EV/ EBITDA
P/Sales

Page 54
ETIHAD ETISALAT
Investment Thesis
Mobily establishing itself as market leader from being market challenger
Mobily is the second-largest
telco in the Kingdom
Etihad Etisalat Company (Mobily) was established in 2004 in the monopolistic Saudi Telecom market, and it launched
commercial services in May 2005. Backed by the UAE-based Etisalat, which paid USD 3.5bn for the mobile licenses
(2G and 3G) in 2004, Mobily currently has a mobile subscriber base of over 11.1mn.
It holds an estimated 40% share of the mobile market and nearly 77% share in the mobile broadband space. Mobily
has been in the forefront of introducing new technologies in the Kingdom; it recently became the first operator to
launch TDD-LTE (4G) services in the Middle East and North Africa region through its subsidiary Bayanat Al Oula.
We forecast Mobilys revenue to reach SAR 25.6bn in 2013 and increase to SAR 26.1bn by 2014, a growth of 8.1%
yoy. We expect companys data revenues to increase their contribution to SAR 8.3bn or ~31% by 2014 compared to
SAR 6.5bn or ~27% in 2012 while the contribution from Mobile / Others (which include product distribution /
Smartphones) is expected to decline to 69% by 2014 from 73% in 2012.
Increasing contribution from data services for Mobily

Revenue trend Mobily (2008-14e) in SARbn
Mobily revenue mix (2008 -14e)
30
100%
25.6
26.5
23.6
25
80%
20.0
20
16.0
17.8
13.1
15
18.1
17.1
10.8
15.6
10
18%
22%
9%
14%
73%
70%
69%
27%
30%
31%
40%
13.1
11.2
82%
78%
91%
86%
60%
20%
9.8
1.0
2008
1.8
2.9
4.4
6.5
7.7
8.3
2009
2010
2011 2012e 2013e 2014e
Broadband / Data
Mobile/ Others
0%
2008 2009 2010

Broadband / Data
2011 2012e 2013e 2014e

Mobile/ Others

Solid mobile infrastructure; but behind in fixed broadband
The strategic Bayanat Al
Oula acquisition offers
Mobily entry into the mobilefixed data convergence
market
We expect Mobily to continue its leadership position in the mobile broadband market; additionally, Mobily is
positioning itself in the fixed broadband market through key acquisitions. The SAR 2.9bn acquisition of Bayanat Al
Oula, a regional WiMax broadband player, in 2010 was a step in this direction. Mobily thus introduced broadband
services, branded as broadband@home, to compete with STC in the household market. Similarly, through the SAR
80mn acquisition of Zajil, a local internet service provider Mobily strengthened its presence in Saudi Arabias
broadband market. However, we highlight that Mobily (30,000 km of fiber) is significantly behind STC (300,000km of
fiber) in the fixed broadband space.
Mobily has more than 8.7mn mobile broadband subscribers and an estimated ~77% market share in Saudi Arabia in
2011. Although STC is expected to make inroads into the mobile broadband space, we see Mobily continuing its
leadership position in Saudi Arabia. The company has completed the deployment of its 4G LTE network across the
Kingdom, and it is poised to compete with STC. Mobily intends to cover more than 32 cities and 85% of the
population in Saudi Arabia under its 4G network.
Mobily is increasingly tilting

its business mix towards
high-ARPU data services, a
positive for margins
Page 55
Furthermore, the favorable broadband penetration trends in the Kingdom are advantageous for Mobily. The company
is increasingly shifting its business mix toward high-ARPU data services. From accounting for only 9% of the
companys total income in 2008, data revenues are expected to reach 33% by 2017. In fact during 4Q 2012, Mobilys
data revenue grew 41% year over year with data traffic volumes of 750 Tb per day as against 163 Tb in 2011. We
expect Mobilys market share in mobile broadband to reach ~71% by 2014 and 65% by 2017.
ETIHAD ETISALAT
Mobile and broadband segment forecast

Mobile segment Subscribers vs ARPU (2010-2017e)
30
24.4
75
25
21.0 21.0
19.0
70
15
65
10
60
5
0
2010
30
20
23.2
24.4
26.8
80
75
19.0
70
15
65
10
60
55
55
50
2011 2012e 2013e 2014e 2015e 2016e 2017e
Mobily Subscribers
22.1
25.6
20
23.2
Subscribers (mn)
21.0 21.0
22.1
26.8
Mobile broadband - Subscribers vs ARPU (2010-2017e)
Subscribers (mn)
25
25.6
80
50
2010
ARPU (RHS)
2011 2012e 2013e 2014e 2015e 2016e 2017e
Mobily Subscribers
ARPU (RHS)

We forecast Mobilys mobile subscribers in Saudi Arabia to reach 22.1mn in 2013 and increase to 23.2mn by 2014,
while mobile ARPU is expected to contract marginally by 1% annually to SAR 67 per month by 2014. In the broadband
market, we expect Mobily to lose some of its market share, mostly to STC and Zain KSA. Mobile broadband
subscribers for Mobily are forecast to reach 10.4mn in 2013 and increase to 12.5mn by 2014, while ARPU is expected
fall 1% annually to SAR 60 per month by 2014. For the fixed broadband segment, we expect the company to make
steady inroads as it completes its FTTH roll-out over the next five years. We forecast Mobily to have a 10% share of
the market by 2017 with an estimated 0.3-0.5mn subscribers by 2017.
Data services the key margin driver, EBITDA outlook positive

Mobily expected to sustain
EBITDA margin levels in the
high 30s over our forecast
period.
While we see Mobilys ARPU contract 1% over our forecast period, increasing contribution from data services and the
expected pricing power through 4G services should translate into higher EBITDA margins for the company. Mobily is
expected to benefit from fiber-optic and 4G data service revenues, which increased by more than 70% in 4Q 2012. The
company invested in the advanced 4G network through Bayanat; this network covers more than 4,500 sites across the
Kingdom. In addition, it is rapidly establishing its presence in the Enterprise segment, the revenues of which grew 71%
yoy in 4Q 2012. Overall, we expect long term operational gearing, data business growth, impact of lower government
royalties (8% versus 15% for mobile) to boost EBITDA margins by 200220 bps over our forecast period (2017e).
Positive EBITDA outlook

EBITDA Margin Outlook 2008-14e (in SAR bn)
12
41%
9.3
10
9.7
8.6
7.5
8
6.2
6
4
EBITDA Margin Outlook 2008-14e (%)
4.8
3.8
38.5%
39%
37.2%
37.0%
37%
36.3% 36.3% 36.5%
35.1%
35%
33%
31%
29%
27%
0
25%
2008 2009 2010 2011 2012 2013E 2014E
2008
2009
2010
2011
2012 2013E 2014E
Page 56
ETIHAD ETISALAT
Earnings outlook is positive

We expect Mobilys earnings to grow 6.4% in 2013 and forecast its 2013 net income to touch SAR 6.4bn. This
translates into an EPS of SAR 8.3 (on 770mn shares outstanding). The net profit margin is expected to remain around
the ~25% level during the forecast period (2017e).
Earnings outlook positive

Earnings per share* outlook 2008-14e (in SAR)
10
Net Income margin 2008-14e (%)

30%
26.3%
8.8
8.3
7.8
8
6.6
5.5
6
3.9
20%
25.4% 25.5% 25.1% 25.7%
23.1%
25%
19.4%
15%
10%
4
2.7
2
5%
0%
2008 2009 2010 2011 2012 2013E 2014E
2008 2009 2010 2011 2012 2013E 2014E
*EPS adjusted for 770mn shares

Page 57
ETIHAD ETISALAT
Management track record and superior ROE are positives for Mobily
Mobily enjoys industryleading ROE; management
track record is a positive
In 2011, Mobily extended its management agreement with Etisalat (UAE) for five years. This irons out any
management-related concerns, unlike the case with STC. The company management has also laid down a stretched
T-Strategy framework that focuses on growth, efficiency, and differentiation (GED). (See Appendices A & B for details
of Executive Management/Corporate Strategy)
Mobily operates at a superior 30%+ RoE (MEA average of 22%), which in our view is a key positive for this name. Its
policy of quarterly dividend distribution as against half-yearly is also a positive for the stock. We forecast Mobily ROE to
average 25.1% in our forecast period (2017e).
Mobilys return profile is industry-leading; ROE outlook positive

Mobily vs select MEA peers - ROE 2011 (%)
Mobily- ROE Outlook (%)
70
31%

60
ROE (%) 2011
30
Etisalat
20
STC
Du
Batelco
10
Qtel
Turkcell
0
0
28%
Mobily
27%
Omantel
Jordan
Telecom
27.4%
26.7%
26.9%
26%
25%
Zain
Kuwait
10
15
ROA (%) 2011
28.7%
29%
Maroc
Telecom
MTN
30.6%
29.9%
30%
Vodacom
50
40
30.3%
24%
20
25
2008 2009 2010 2011 2012 2013E 2014E
Page 58
ETIHAD ETISALAT
Mobily to continue its ambitious capex program

According to management, the company plans to invest around SAR 22.0bn in network infrastructure development
over the next five years. Mobily recently awarded contracts worth SAR 963mn (USD 256mn) to Huawei and Ericsson
for upgrading its 3G and 4G networks. Besides investing in the mobile broadband space, Mobily aims to strengthen its
fiber optic network to cover 500,000 residential units by 2013. In light of the capex program, the companys capexsales ratio is expected to remain ~16% in our forecast period.
Aggressive Capex plan at Mobily

Capex outlook 2008-14e (in SAR bn)
Capex-Sales 2008-14e (%)
29%
4.9
4.5
4.2
3.7
4
3.3
3.0
27.4%
27%
3.2
25.2%
25%
23%
3
21%
2
18.5%
19%
17%
15%
2008
2009
2010
2011
17.5%
16.0%
2008
2012 2013E 2014E
20.6%
19.8%
2009
2010
2011
2012 2013E 2014E

Mobilys high capex program is expected to dent free cash flows for the near term. We forecast Mobily to generate
SAR4-6bn annually in our forecast period. Mobily offers a free cash flow yield of 7.3% on 2013 estimates.
Capex plans to dent free cash flows in the near term

Free cash flow outlook 2013-17e (in SAR bn)
7
6.3
5.9
Free cash flow yield 2013-17e (%)

14%
12%
5.5
5.0
9.5%
10%
4.2
8%
6%
4%
10.2%
11.0%
8.6%
7.3%
2%
0%
2013E
2014E
2015E
2016E
2017E
2013E
2014E
2015E
2016E
2017E
Page 59
ETIHAD ETISALAT
Mobily is a key asset for Etisalat; a case for future stake increase exists
Etisalat could look to expand
its participation in Saudi
Arabia beyond its current
27.5% interest.
With the growth outlook for Mobily being positive, we look at the business case for Etisalat to consider increasing its
stake in Mobily beyond 27.5%. We expect the following factors as being favorable from Etisalats perspective:
a)
Mobily is a high-ROE operation in a lowrisk, high-growth market;
b)
High degree of competition in the domestic market UAE Du has successfully penetrated the market is pushing
the company to chase growth outside the UAE;
c)
Etisalats other international operations are at high risk in the current geopolitical climate, for example Egypt
(Etisalat Misr), Pakistan (PTCL) and Sudan
Mobily expected to continue with the shareholder-friendly policy

The recent Board approval for a bonus share (1:10) indicates managements focus on rewarding shareholders. Despite
the resultant increase in its capital base (770mn shares), we expect the company to raise the payout ratio (55% over
the forecast period). Mobilys shares offer an attractive dividend yield of 6.4% at the current market price. The company
is paying a dividend of SAR 1.15 per share each quarter and is expected to increase its full year dividend to SAR 5.0
per share in 2013. This translates into a post-bonus payout ratio of 55%. Mobily has a strong balance sheet with SAR
5.1bn in cash as of 4Q 2012 and SAR 8.7bn in Short term investments.
Our forecast vs. consensus

Our forecasts for Mobily are broadly in line with the Bloomberg consensus estimates. For 2013, we forecast revenue of
SAR 25.6bn and EPS of SAR 8.3, in line with consensus. However, we expect a lower EBITDA margins (than
consensus) going forward reflecting our more conservative view on the pace of margin improvement and increasing
competition in the mobile broadband space (Mobily expected to lose market share).
Broadly in line with consensus

Forecast
2013e
Revenue (SAR mn)
Saudi
Fransi
Capital
25,553
EBITDA ( SAR mn)
9,267
2014e
Consensus
Difference
(%)
25,608
-0.2%
Saudi
Fransi
Capital
26,461
9,411
-1.5%
9,660
EBITDA margin (%)

36.3%
36.8%
EPS (SAR per
8.3
8.4
share)
*Consensus forecast as of February 11, 2013
-48bps
-0.5%
Consensus
Difference
(%)
27,333
-3.2%
10,042
-3.8%
36.5%
36.7%
-23bps
8.8
8.9
-0.3%
Page 60
ETIHAD ETISALAT
4Q 2012 results: Continuous business momentum

Mobily continued to witness strong business momentum and reported a solid set of numbers for 4Q 2012. Leveraging
on Hajj season activities, the companys top line grew 16.7% yoy to SAR 6.8bn, while EBITDA increased 10.3%. Data
revenue (up 40%) continued its double-digit trajectory and accounted for 30% of total revenue in 4Q 2012. Earnings
were up 10.7% yoy for the quarter to reach SAR 1.7bn.
Results snapshot 4Q and FY2012

4Q 2011
4Q 2012
Difference
(%)
2011
2012
Difference
(%)
Revenue
5,802
6,772
16.7%
20,052
23,642
17.9%
Gross profit
3,087
3,479
12.7%
10,326
12,034
16.5%
Operating Income
1,754
1,902
8.4%
5,305
6,192
16.7%
EBITDA
2,305
2,541
10.3%
7,454
8,591
15.3%
Net Income
1,697
1,878
10.7%
5,083
6,018
18.4%
In SAR mn
Page 61
ETIHAD ETISALAT
Valuation
We arrive at a fair value of SAR 80.6 per share for Mobily
Mobily looks fully priced at
current levels, limited upside
seen.
We valued Mobily using the Weighted Average approach. The methods used include discounted cash flow, Fair P/E
and EV/ EBITDA multiple. We assigned higher weight to DCF approach, and arrived at a fair value a fair value of
SAR 80.6 per share for Mobily, indicating a 7.8% upside from current levels.
Valuation summary of Mobily

Fair Value
Weights
DCF Valuation
79.2
40%
EV/ EBITDA
71.4
30%
P/E Multiple
91.8
30%
Weighted Average Fair Value
80.6
Upside/(Downside) from current market price %
7.8%
Valuation - Scenario Analysis

Base
Case

expected to reach 210% by 2017e.
Mobily to retain 40% market share in

mobile services and 65% share in mobile
broadband.
Price-based competition to affect ARPU,

expected to decline of 1% yoy.
70
Capex-sales to moderate to 16% over the

long term.
60
Bull
Case

expected to reach 230% by 2017e.
Mobily to emerge market leader in Mobile

service with 45% market share; to hold
70% market share in mobile broadband.
Operators to focus more on service

differentiation
beyond
price-based
competition; ARPU expected to decline of
remain flat yoy.
Capex-sales to moderate to 14% over the

long term.
Bear
Overall, we find Mobily shares to be almost fully priced Case
at current levels; 7.8% upside potential seen.
Penetration rates in Saudi Arabia expected

to reach only 195% by 2017e.
Fair Value estimate at different scenarios

100
SAR 92.4
90
SAR 80.6
80
SAR 71.0
50
40
Jan-12
Apr-12
Jul-12
Bull Case
Oct-12
Jan-13
Base Case
Fair Value
Bear Case
We would wait and observe Mobilys progress in

penetrating Saudi Arabias fixed broadband market.
Initiating coverage with a HOLD rating
Mobily is unable to maintain market

position and loses out to competition
STC and Zain KSA.
Aggressive price-based competition to

deteriorate ARPUs considerably; decline of
2% yoy.
Cost overruns in Fiber rollout to increase

capex;
deployment
of
emerging
technological changes.
Sources: Bloomberg; Saudi Fransi Capital analysis
Page 62
ETIHAD ETISALAT
Discounted Cash Flow (DCF)

Our DCF model is based on a five-year explicit forecast period until 2017. We arrived at a WACC of 10.7% for Mobily,
slightly lower than what we used for STC. In terms of terminal growth, we applied a 2.5% terminal growth rate to
estimate the terminal value. Our DCF approach yields a fair value of SAR 79.2/share.
Mobily: Discounted cash flow valuation summary

In SAR mn
2013e
2014e
2015e
2016e
2017e
EBIT * (1-t)
6,550
6,950
7,388
7,718
8,038
Add: Depreciation and Amortization
2,653
2,643
3,015
3,368
3,740
Changes in Working capital
(514)
(389)
(469)
(506)
(543)
(4,465)
(4,234)
(4,468)
(4,698)
(4,926)
Free Cash flow to Equity
4,224
4,970
5,465
5,882
6,309
Present Value of the free cash flow
3,862
4,105
4,079
3,965
3,843
Capital expenditure
79,113
Terminal Value
PV of future cash flows
19,854
PV of terminal value
48,190
Total Enterprise Value
68,045
Add: Cash
1,302
Less: Debt
8,258

Equity Value
Number of shares (mn)
Upside/(Downside) %
137
60,951
770
SAR 79.2
5.9%
Page 63
ETIHAD ETISALAT
Fair Price-Earnings (P/E) multiple approach

We use a Fair P/E multiple approach using the formula (RoE-g)/((RoE*(Ke-g)), which in our view best captures the
risk/return and growth prospects of the company. We arrive at a Fair P/E multiple of 11x for Mobily, a moderate
premium to MEA 2013 median P/E multiple (reflecting the companys superior ROE) based on a ROE assumption of
25.4%, growth of 2.5% and a discount rate of 10.7%. Our Fair value estimate using P/E approach is SAR 91.8 per
share derived by applying 11x P/E multiple to 2013 earnings forecast of SAR 8.3 per share.
Relative valuation
For Mobilys market approachbased relative valuation, we used the EV/EBITDA multiple, which we believe are the
most-suited for valuing Mobily. We selected a peer group of telcos operating within the GCC region as well as those
based outside of the GCC but with operations in the MEA region (MTN, Vodacom, Maroc Telecom). Our comparative
valuation is summarized in the following table. We expect Mobily to continue commanding a premium over GCC peers
and trade in line with the median valuation multiples of its MEA peer group.
Relative Valuation
Market
Cap
Price/Earnings (x)
EV/ EBITDA (x)
Company
(USD)
2012e
2013e
2014e
2012e
2013e
2014e
Saudi Telecom
21,282
10.7
9.0
8.7
5.1
4.6
4.2
Etihad Etisalat
15,349
7.6
9.0
8.5
6.1
6.9
6.5
Etisalat
20,944
10.1
9.9
9.6
4.3
4.1
4.0
Du
4,493
9.9
9.5
9.5
4.1
3.6
3.3
Batelco
1,589
7.8
8.3
6.9
5.1
4.9
4.5
Omantel
2,770
8.9
8.5
8.3
4.8
4.7
4.6
Zain Kuwait
12,215
11.6
11.6
10.8
6.7
6.7
6.5
Qtel
10,153
11.4
9.0
8.4
4.6
4.4
4.2
1,887
14.5
13.4
12.7
6.7
6.5
6.3
Turkcell
14,000
12.3
11.3
10.6
6.8
6.2
5.6
Vodacom
19,460
16.2
13.9
13.1
8.1
7.4
6.9
MTN
37,619
15.1
13.3
12.1
5.8
5.6
5.2
Maroc Telecom
10,961
12.7
12.5
12.7
6.5
6.6
6.6
Median Multiple for Saudi

Arabia (Ex- Zain KSA)
9.1
9.0
8.6
5.6
5.8
5.3
Median Multiple for GCC
10.0
9.0
8.6
4.9
4.7
4.4
Median Multiple for MEA
11.4
9.9
9.6
5.8
5.6
5.2
Jordan Telecom
Sources: Bloomberg, Saudi Fransi Capital Analysis

Note: Relative valuation based on closing prices as of February 11, 2013
EV/ EBITDA approach: We apply a 20% premium to MEA peers EV/EBITDA to reflect the companys risk/return and
growth prospects of Mobily and our applied EV/ EBITDA multiple of 6.7x. We justify this premium with the fact that
Mobily offers a significantly above average ROE. Our Fair value estimate using the EV/EBITDA approach is SAR 71.4
per share; this was arrived at by applying a 6.7x EV/EBITDA to the 2013 EBITDA forecast of SAR 9.3bn and deducting
net debt and liabilities of SAR 7.1bn.
Page 64
ETIHAD ETISALAT
FINANCIALS INCOME STATEMENT

Income Statement (in SAR mn)
2008
2009
2010
2011
2012
2013E
2014E
Revenues
10,795
13,058
16,013
20,052
23,642
25,553
26,461
Cost of Services and sales
(4,768)
(5,512)
(7,230)
(9,726)
(11,608)
(12,547)
(12,928)
6,026
7,547
8,783
10,326
12,034
13,006
13,533
Gross Profit
Gross margin (%)
55.8%
57.8%
54.9%
51.5%
50.9%
50.9%
51.1%
(815)
(1,093)
(1,059)
(1,173)
(1,397)
(1,518)
(1,572)
General & Administrative Expenses
(1,417)
(1,617)
(1,559)
(1,699)
(2,046)
(2,221)
(2,300)
Depreciation & Amortization
(1,299)
(1,629)
(1,810)
(2,149)
(2,399)
(2,653)
(2,643)
Total Operating Expenses
Selling & Marketing Expenses
(3,531)
(4,339)
(4,429)
(5,021)
(5,842)
(6,392)
(6,515)
Operating Income
2,495
3,208
4,355
5,305
6,192
6,614
7,018
EBITDA
3,794
4,837
6,165
7,454
8,591
9,267
9,660
35.1%
37.0%
38.5%
37.2%
36.3%
36.3%
36.5%
(437)
(204)
(146)
(213)
(169)
(183)
(192)
41
41
70
46
65
66
67
2,099
3,045
4,279
5,138
6,088
6,497
6,893
(7)
(31)
(67)
(54)
(70)
(91)
(96)
2,092
3,014
4,211
5,083
6,018
6,406
6,797
2.7
3.9
5.5
6.6
7.8
8.3
8.8
EBITDA margin (%)

Finance expenses
Other Income
Income before Zakat
Zakat
Net Income
Basic EPS (SAR)
DPS (SAR)
0.7
1.1
1.8
3.0
3.9
4.6
4.9
No: of shares
770
770
770
770
770
770
770

Page 65
ETIHAD ETISALAT
FINANCIALS - BALANCE SHEET

Balance sheet (in SAR mn)
2008
2009
2010
2011
2012
2013E
2014E
Cash and cash equivalents
1,264
933
1,661
1,690
1,302
2,715
4,483
Short Term Investments
1,050
600
450
Accounts Receivable, net
3,098
5,481
5,748
6,323
5,904
6,445
6,815
Due from Related Parties, net
38
69
23
11
108
132
297
470
721
772
800
Prepaid Expenses & Other assets
1,063
1,361
1,237
1,399
2,493
2,669
2,764
Total Current Assets
6,621
8,577
9,415
9,893
10,427
12,608
14,868
Inventories, net
Property, plant and equipment, net
8,117
10,370
12,457
16,412
17,255
19,646
21,818
10,923
10,450
10,028
9,665
9,412
8,833
8,252
1,530
1,530
1,530
1,530
1,530
1,530
1,530
Total Non Current Assets
20,570
22,349
24,015
27,607
28,197
30,009
31,600
Total Assets
27,192
30,926
33,430
37,501
38,623
42,617
46,468
Short-term loans
1,862
371
599
1,201
Current portion of long term debt
1,286
1,777
1,843
4,895
753
915
938
Accounts Payable
4,367
6,167
6,225
7,808
5,580
5,639
5,872
Licenses, Acquisition fees, net

Goodwill
Due to related parties
78
211
281
194
132
138
143
3,155
3,663
3,307
3,949
3,609
3,865
4,002
10,749
12,189
12,256
18,047
10,075
10,556
10,955
6,642
6,448
5,529
977
7,506
8,124
8,530
46
47
66
89
137
167
175
Total Non Current Liabilities
6,688
6,495
5,595
1,066
7,643
8,291
8,705
Authorized, issued and outstanding

share capital
7,000
7,000
7,000
7,000
7,000
7,700
7,700
Accrued expenses and other liabilities

Total Current liabilities
Long term loans
Provisions for end of service benefits
Statutory reserve
347
649
1,070
1,578
2,180
2,820
3,500
2,407
4,595
7,510
9,810
11,726
13,249
15,608
Total Shareholders equity
9,754
12,243
15,580
18,388
20,906
23,769
26,808
Total liabilities and equity
27,192
30,926
33,430
37,501
38,623
42,617
46,468
Retained earnings
Page 66
ETIHAD ETISALAT
FINANCIALS CASH FLOW STATEMENT

Cash flow statement (in SAR mn)
2008
2009
2010
2011
2012
2013E
2014E
3,546
4,246
5,470
6,673
7,037
8,833
9,332
(5,571)
(2,889)
(3,227)
(3,408)
(5,086)
(4,465)
(4,234)
2,586
(1,687)
(1,516)
(3,237)
(2,338)
(2,761)
(3,329)
Net increase/ decrease in cash and cash

equivalents
561
(331)
728
28
(387)
1,606
1,769
Cash & cash equivalents at the beginning

of the period
703
1,264
933
1,661
1,690
1,302
2,715
Cash & cash equivalents at the end of the

period
1,264
933
1,661
1,690
1,302
2,715
4,483
Net cash flows from investing activities

Net cash generated from financing
activities
Page 67
Appendix: Telecom sector

Appendix A Telecom sector snapshot
Key parameters
2007
Mobile subscribers (mn)

Mobile penetration (%)
2008
2009
2010
2011
2012e
2017e
28.4
36.0
44.8
51.6
53.7
53.5
66.9
114%
140%
168%
187%
191%
192%
210%
Fixed line subscribers (mn)
4.0
4.1
4.2
4.1
4.6
4.9
6.4
Fixed line penetration* (%)
65%
65%
63%
63%
66%
67%
70%
0.6
1.0
1.4
1.7
2.0
2.3
3.5
14%
23%
30%
35%
39%
45%
60%
STC
61%
53%
48%
47%
47%
46%
40%
Mobily
39%
41%
41%
37%
39%
40%
45%
Zain KSA
0%
6%
12%
16%
14%
14%
15%
Mobile broadband subscribers

(mn)
0.1
0.3
1.4
2.7
11.3
12.4
22.3
Mobile Broadband penetration

(%)
0.3%
1.3%
5.4%
9.8%
40.3%
43.0%
70.0%
Fixed broadband subscribers

(mn)
Fixed Broadband penetration*
(%)
Market share Mobile (%)
* as a % of households
Sources: CITC, ITU, Saudi Fransi Capital analysis
Appendix B Telecom Infrastructure STC/ Mobily

STC
Technology Generation
Platform
Frequency
Launch
2G
GSM
900
1996
2.5G
GSM
900
2004
2.5G
GSM
900
2005
3G
W-CDMA
2100
2006
3.5G
W-CDMA
2100
2006
3.5G
W-CDMA
2100
2009
3.5G
W-CDMA
2100
2009
LTE
2011
4G

Mobily
Year
Technology introduced by Mobily
Aug-2006
UMTS
May-2007
UMTS/ HSDPA
Dec-2008
HSDPA Trial
Mar-2009
HSPA Launch
Feb-2009
HSPA+ Trial
Apr-2009
LTE Trial
Dec-2009
HSPA+ Launch
Sep-2012
TDD LTE Launch
Page 68
Appendix C Fixed/ Mobile Technologies

Fixed Network
Download Speed
Technology
Mobile Network
Download Speed
Technology
ADSL
1 Mbps
GPRS
80 Kbps
ADSL+
24 Mbps
EDGE
384 Kbps
VDSL
52 Mbps
UMTS
2 Mbps
FTTH
I00 Mbps
LTE
30 Mbps
FTTx GPON
I0 Gbps
IMT Advanced
I Gbps
Sources: Telefonica, Saudi Fransi Capital analysis
Page 69
Appendix: Saudi Telecom Company

Appendix A: Executive Management
Executive
Eng. Abdulaziz A. Alsugair
Dr. Khaled Abdulaziz Al Ghoneim
Jameel Bin Abdullah Al Molhem*
Krishnan Ravi Kumar
Dr. Fahad Hussain Mushyat
Eng. Mohammad Bin Nasser Al Jasser
Eng. Ibrahim Bin Abdulrahman Al Omar
Eng. Mazid Bin Nasser Al Harbi
Ameen Bin Fahed Al Shiddi
Dr. Mahmoud Abdulkarim Al Khatib
Dr. Homoud Mohammed Al Kusayer
Eng. Bandar Mohammad Al Gafari
Eng. Omar Abdullah Al Nomany
Title
Chairman of The Board
Chief Executive Officer (CEO) of STC Group
CEO of STC Saudi Arabia*
Group Chief Financial Officer (CFO)
Vice President (VP) of Strategy Affairs
VP of Enterprise Services
VP of Personal Services
VP of Home Services
VP of Finance
VP of Regulatory Affairs
VP of Wholesale
VP of Network Sector
VP of Information Technology

* CEO of STC Saudi Arabia Jameel Bin Abdullah Al Molhem resigned recently
Appendix B: Timeline STC

Year
Development
1998
Established in Saudi Arabia
2002
Goes public via IPO
2003
DSL services launched in Saudi Arabia
2005
Introduces 3/3.5G services
2007
Purchases stake in Maxis Communications
2007
Wins third mobile license in Kuwait
2008
Acquires 35% stake in Oger Telecom
2008
Launches operations in Indonesia PT Axis
2009
Wins third mobile license in Bahrain
2010
Launches IP TV and triple play services in Saudi Arabia
2011
Increases stake in Indonesia to 80.1%
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Appendix: Etihad Etisalat Company (Mobily)

Appendix A: Executive Management
Executive
Title
Abdulaziz Saleh Al Saghyir

Khaled Omar Alkaf
Abdulaziz Al Tamami
Thamer Al Hosani
Abdulrahman Ghaleb
Marwan Al Ahmadi
Hamed Al Kharji
Ahmed Al Hashimi
Mohammed Saad Beseiso
Medhat S Amer
Mohammed Basafi
Nasser Al Nasser
Taher Bin Ammar Bin Taher Al Dabbagh
Fadi G Kawar
Dr Fahed Moussa Al Zahrani
Sami Nashwan
Nader Nuwayhid
Chairman
Chief Executive Officer and Managing Director
Chief Operating Officer
Chief Financial Officer
Chief Contracts and Administrative Officer
Chief Business Officer
Chief HR Officer
Chief Marketing Officer (Acting)
Chief Sales & Customer Relations Officer
Chief Information Officer
Chief Technical Officer (Fixed and Broadband Network)
Chief Technical Officer (Mobile Radio Network)
Senior Vice President, Partnership Strategy and Development
Senior Vice President, Finance Strategy
Senior Vice President, Human Resources
Senior Vice President, Consumer Marketing
Vice President, Investor Relations and Corporate Governance
Appendix B: GED strategy framework - Mobily

Strategic Frame Development
Action
Growth (G)
Mobily plans to tap the broadband market opportunity in the Kingdom and focus on developing international
wholesale. Mobily seeks to leverage on its existing base of both consumer and corporate businesses.
Efficiency (E)
Optimizing Capex/Opex through network outsourcing and infrastructure sharing and aims to realize synergies
by process optimization.
Differentiation (D)
Differentiation aspect revolves around a focus on improving customer experience, drive innovation, service
standardization across product offerings and focus on developing skilled staff.
Sources: Investor Presentation December 2012, Mobily, Saudi Fransi Capital analysis
Page 71
Recommendation Framework
Recommendation Framework
BUY: The analyst recommends a BUY when our fair value estimate is at least 10% higher than the current share price.
HOLD: The analyst recommends a HOLD when our fair value estimate ranges within 10% of the current share price.
SELL: The analyst recommends a SELL when our fair value estimate is lower by more than 10% from the current
share price.
Page 72
Research & Advisory Department
Research & Advisory Department
Head of Research & Advisory

Roy Cherry
+966-1-2826844

Call centre
800-124-3232
Website: www.sfc.sa
Page 73
Disclaimer
Disclaimer
This report is prepared by Saudi Fransi Capital (SFC), a fully fledged investment firm providing investment banking,
asset management, securities brokerage, research, and custody services. SFC, and its affiliate, might conduct
business relationships with the company that is subject of this report and/ or own its security.
This report is based on current public information that we consider reliable, but we do not represent it is accurate or
complete, and it should not be relied on as such. Accordingly, no representation or warranty, express or implied, is
made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the
information and opinions contained in this report.
This report is intended for general information purposes only, and may not be reproduced or redistributed to any other
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Rating Summary

International markets offer long-term growth prospects for STC: International

Refer to important terms or use, disclaimers and disclosures on back page.

Valuation Summary 2013e

Sources: Company, Saudi Fransi Capital analysis

Telecom stock movement vs TASI

EBITDA margins to expand; earnings outlook positive: We forecast broadband to

Prices as of February 11, 2013; * Not covered

Mobily played out; STC unfolding

Telecom | Equity Research | 12 February 2013

Saudi Arabia Telecom

Saudi Fransi Capital

Saudi Arabia Telecom

Telecom | Equity Research | 12 February 2013

STC: Key Forecast

EPS vs Net income margin (2012-2017e)

Ebitda margin (%)

2012 2013e 2014e 2015e 2016e 2017e

2012 2013e 2014e 2015e 2016e 2017e

Ebitda Margin (%) (RHS)

Capex (in SAR bn)

Capex vs Capex-Sales (2012-2017e)

Net income margin (%)

EPS (in SAR per share)

Revenue (in SAR bn)

Net Income Margin (%) (RHS)

Capex-sales (%) (RHS)

Sources: Company reports, Saudi Fransi Capital analysis

Mobily: Key Forecast

EPS vs Net income margin (2012-2017e)

Capex vs Capex-Sales (2012-2017e)

2012 2013e 2014e 2015e 2016e 2017e

Ebitda Margin (%) (RHS)

Net Income Margin (%)

Capex (in SAR bn)

Net income margin (%)

EPS (in SAR per share)

Ebitda margin (%)

Revenue (in SAR bn)

Revenue and EBITDA margin (2012-2017e)

Capex-sales (%) (RHS)

Sources: Company reports, Saudi Fransi Capital analysis

Saudi Fransi Capital

Saudi Arabia Telecom

Telecom | Equity Research | 12 February 2013

Summary financials and ratios STC and Mobily

Earnings per share, SAR

Dividend per share, SAR

EBITDA margin (%)*

Key Ratio and Valuation

Cash flow yield (%)

Mobily (in SARmn)

Earnings per share, SAR

Dividend per share , SAR

EBITDA margin (%)

Key Ratio and Valuation

Cash flow yield (%)

Sources: Bloomberg, Company reports, Saudi Fransi Capital analysis

Saudi Fransi Capital

Saudi Arabia Telecom

Telecom | Equity Research | 12 February 2013

Saudi Arabian Telecom Market ........................................................................................................................................ 13

STC: Investment Highlights ............................................................................................................................................. 31

Saudi Fransi Capital