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Telecom: supporting a move to higher connectivity Hootan Yazhari, CFA >> Merrill Lynch (DIFC) hootan.yazhari@baml.com Table 15: Key NTP objectives for the Ministry of Communications and Information Technology 2020 Regional Int'l No. Strategic objective Key Performance Indicator (KPI) Unit Baseline target ferrante birwarle Provide critical resources, especially frequency Percentage of frequency spectrum available for 1 spectrum for Information telecommunications — telecommunication services out of the total allocated % 42 80 NA >90 and Technology services telecommunication services Percentage of FTTH coverage in densely populated urban areas Percentage of FTTH coverage in urban areas % 12 55 >90 >80 Percentage of wireless broadband networks’ coverage (more % 42 70 NA 74 than 10 Mbps) in remote areas Maturity level of the government services transformation to Develop and activate smart government e-services transactions based on a common infrastructure KSA’s rank in the United Nations index for the development % 36 25 18 1 of e-government 4 Bridge the digital gap in the skills of ICT users | Percentage of internet users in KSA % 63.7 85 90.4 87.9 Source: National Transformation Plan Provide broadband services to all KSA regions by stimulating investment in infrastructure and developing tools, technical and regulatory frameworks % 44 80 >95 >90 % 44 85 NA NA NTP helps increase penetration of higher margin offerings We believe the National Transformation Plan will herald significant change for the Saudi telecom sector over the next five years. In particular, its focus on increasing access to high speed internet (via wireless and fibre) should underpin a material uplift in data usage and broadband penetration levels. Given these offerings represent the highest margin services provided by the telecom service providers, we believe the move towards a more data intensive society should be supportive for industry margins. Furthermore, with the NTP’s plans relying heavily on private sector investment (including STC), we believe it could accelerate the spin out of tower portfolios from the three telecom players in the Kingdom (as a way of raising financing). Government investment set to exceed US$2bn As part of the National transformation plan, the government is seeking to invest more than US$2bn in the expansion of wireless (3G & 4G) and fibre infrastructure (FTTH) across the kingdom. Whilst the finer details on how this expenditure will be deployed (e.g. via grants or via direct investments?) have yet to be disclosed, details of the NTP suggest it will be used to expand connectivity in the remote areas of Saudi Arabia (given the telecom companies have largely avoided such expenditure in the past given low returns), as well as increasing network density in developed and urban areas. Spectrum increases an indication of ambitious growth The government is also looking to significantly enhance the availability of spectrum to the telecom industry (from 42% to 80% of total spectrum allocated), highlighting the expected surge in data usage in the Kingdom to 2020 and beyond. Whilst data usage in the Kingdom has been rapidly growing in recent years on the back of high speed rollouts (3G & LTE), demand still lags global and regional averages (as indicated by data as a percentage of total mobile revenues). Ultimately, we believe this will have a number of effects including: (1) Saudi Arabia will further increase its focus on high speed offerings, (LTE/LTEA and eventually 5G); (2) capex cycles will likely lengthen as telecom companies intensify their rollout of coverage; and, (3) tower density will likely have to increase across the key demand centres. 48 GEMs Paper #26 | 30 June 2016 38 Merrill Lynch HOUSE_OVERSIGHT_016158