Asian Telecom – An Equity Investor’s Perspective Satish Tamboli Emerging Markets Partnership

1. Asian Telecom – An Equity Investor’s Perspective Satish Tamboli Emerging Markets Partnership 4 June, 2003

2. Asian Emerging Markets Major Service Providers • Korea (KT, SKT, KTF, LGT, Hanaro) • China (Telecom,Unicom,Mobile) • India (Bharti, Reliance, Tata) • Philippines (PLDT/Smart, Globe, Digitel) • Indonesia (PT Telkom, Satelindo) • Malaysia (TM, Maxis, Celcom) IFC Bankers Meeting 2

3. Major Trends • Nominal Growth in the Wireline subscribers; 6 – 8 % YoY • Marginal growth in Broadband services • Korea approaching saturation at 70% household penetration. • Explosive growth in mobile business • Subscriber growth; 30% + YoY IFC Bankers Meeting 3

4. Major Trends - continued • Strong Subscriber growth in China, India, Indonesia, Thailand driven by : • Downward pressure on tariffs (deregulation) • Dramatic reduction in handset prices • Declining ARPUs despite increased airtime usage • Revenue & EPS decelerating. • In 1Q2003, Revenue growth was 5.6%, down from 10.4% in 4Q2002. • In 1Q 2003, EPS growth was 0%, down from 4.8%. • Significant cutbacks in Capital expenditure. Most operators are delaying plans for 3G deployment. • Resilient EBITDA • Realistic valuations IFC Bankers Meeting 4

5. S. Korea • Three wireless operators • SK Telecom, 18.5m subs, 54 % market share • KT Freetel, 10.5m subs, 32 % market share • LG Telecom, 4.9m subs, 14% market share • Nature of competition is shifting from capturing market share to subscriber retention and organic growth. Govt. mandated ban on handset subsidies. • Difficult to achieve service differentiation on the basis of technology. Competitive edge depends on : • operating scale – to gain bargaining power over handset manufacturers • financial strength – to build brand power via advertisement • Govt. will continue to support “asymmetric” regulations to support LGT and to a lesser extent KTF in order to maintain equilibrium. • Dominance of SKT and KTF will continue. IFC Bankers Meeting 5

6. The Broadband Dream is Alive and Well in Korea • The dominant players are : • KT – 5.4 m subscribers, 48% market share • Hanaro – 3.1 m subscribers, 28% market share • Thrunet – 1.3 m subscribers, 11% market share • Market nearing saturation with 70% household penetration. 11% subscriber growth is forecasted for 2003. • KT’s EBITDA margins on broadband service are around 50% vs. Hanaro’s 30%. • Decline in ARPUs is being stabilized by migrating to a higher-end VDSL (Very High Speed DSL) services. IFC Bankers Meeting 6

7. China - Awesome Market • China is the largest mobile market in the world with 207 m subscribers : • China Mobile (HK) : 117.6 m subs • China Unicom (HK) : 43.1 m subs • Unlisted Parent Companies : 45.8 m subs • China accounts for 30 % of the world’s net addition in subscribers. As of 4Q2002, YoY subscriber growth was 38%. • The Chinese operators are still “State Owned Enterprises” with more than 70% of their shares owned by unlisted parent companies and ultimately the Ministry of Finance. • Ministry of Information Industry (MII) will continue to direct the further evolution of the Chinese telecom sector IFC Bankers Meeting 7

8. China Highlights • Contrary to global trend, China is increasing capital spending on equipment. • China Telecom & China Netcom continue to build long-haul networks • China Mobile will continue to upgrade its network • China Unicom will complete its CDMA 1X build-out • CDMA is being positioned as an environmentally friendly service with more trendy handsets • Chinese domestic handset manufacturers have been preparing for three years to compete with foreign handset manufacturers. • Inventory levels are starting to push down prices • 22% decline in handset prices in 2.5 months • Other Asian markets are being penetrated by cheap Chinese handsets IFC Bankers Meeting 8

9. India • One of the fastest growing markets in Asia: • 10.5 m subscribers • YoY growth rate : 91 % • Driven by a fierce price war and cheap handsets • ARPU declining 30% YoY with a 13% increase in usage • The dominant operators will be : • Bharti Televentures • Reliance Infocom • Idea Cellular (Tata) • Hutchison • BSNL/MTNL (Govt. owned incumbent) IFC Bankers Meeting 9

10. India • Reliance, Tata, and MTNL/BSNL are trying to differentiate their service by using CDMA WLL technology with limited mobility in contrast to fully mobile GSM. Impact on market share remains to be seen. • There are several weaker players who do not have sufficient geographical footprint or access to long-term capital in order to be viable on a stand-alone basis : • Escotel • RPG Cellular • Aircel Digilink • BPL • Spice • Koshika • Hexacom IFC Bankers Meeting 10

11. India • Access to long-term non-recourse debt constrained by : • weak balance sheets • lack of financial support from sponsors • limits on foreign ownership (less than 49%) • Valuations are at an all time low • Consolidation is very likely over the next 2 - 3 years • Partnering with one of the stronger players can provide good investment opportunity IFC Bankers Meeting 11

12. Philippines • High Growth Market with 15 m subscribers, growing at 38% YoY. • ARPU has held steady for the past two years. EBITDA margins at 53%, one of the highest in the world. • Data services contribute to 37% of revenue - the highest in the world. (2x Japan and 3X Korea) • Dominant players : • SMART (subsidiary of PLDT) - 6.8 m subs • Globe - 6.5 m subs • Recent entrant - Digitel - could trigger price war and destabilize the market. Too early to tell IFC Bankers Meeting 12

13. Indonesia • Indonesia has 11 m subs growing at 72% YoY. • Three dominant operators: • Telkomsel - 6 m subs (55% market share) • Indosat (Satelindo + IM3) - 3 m subs (27% market share) • Excelcomindo - 1.8 m subs (17 % market share) • Excelcomindo is the weaker of the three players with restricted access to capital. • Telekom Malaysia has submitted an offer to acquire a meaningful stake in Excelcomindo. • Successful acquisition could trigger a price war IFC Bankers Meeting 13

14. Crystal Ball • Too many players in a highly competitive, intensely capital hungry business. • Consolidation is inevitable – the strong players will acquire the assets of the weak. • Timing is uncertain ; probably over the next 2-3 years. • Depending on local business practices, regulatory framework, and political conditions, the weak players can delay the inevitable by dragging the consolidation process further. IFC Bankers Meeting 14

15. Gaining from Consolidation • Consolidation can be profitable by structuring a deal with a reputable consolidator. Equity investors and lenders can work together to create a fully funded business plan. Look for: • Quality of Sponsor • Strong Balance Sheet • Deep pockets • Track record of treating minority shareholders • Well established Market leader • Valuations are much more realistic today IFC Bankers Meeting 15

16. Potential Consolidationsto watch • Korea - Hanaro & Thrunet • Thrunet is in “Chapter 11” court receivership and Hanaro’s 1Q2003 results have been worse than expected. Govt. likely to implement asymmetric regulation to favor Hanaro and Thrunet in order to offset KT’s dominant position. • India – Escotel, BPL, Spice • Indonesia - Excelcomindo (may be acquired by Telekom Malaysia) IFC Bankers Meeting 16

17. In the meantime, who’s making money ? • The Equipment suppliers and handset manufacturers ! IFC Bankers Meeting 17