Telecommunications Sector Presentation

May 10, 2011

Jiang Zhu

Tim Williamson

Agenda

• Sector Overview

• Analyses:

o Business

o Economic

o Financial

o Valuation

• Conclusion

• Recommendations

Sector Overview

Sector S&P 500 Weight SIM Weight +/-

Consumer Discretionary 10.60% 10.61% 0.01%

Consumer Staples 10.42% 8.16% -2.25%

Energy 13.09% 11.04% -2.04%

Financials 15.47% 13.62% -1.85%

Health Care 11.27% 10.39% -0.88%

Industrials 11.23% 11.09% -0.13%

Information Technology 18.07% 22.75% 4.69%

Materials 3.66% 3.09% -0.57%

Telecommunication Services 2.98% 4.19% 1.21%

Utilities 3.23% 2.26% -0.97%

Cash 0.00% 2.71% 2.71%

Dividend Receivables 0.00% 0.08% 0.08%

100.00% 100.00% 0.00%

Industry Information

Name Market Cap

Telecom Services-Foreign 498B

Telecom Services-Domestic 382B

Wireless Communications 27,220B

Sector Information

SIM Holding Information

Name Market Cap

NII Holdings, Inc. 7.1B

Total 7.1B

Telecom Services:

4.19%

SIM Weighting

Telecom 2.98%

Others, 97.02%

Current Market Weighing

Wireless Communications

Largest Companies

Telecom Services-Domestic

Name Market Cap

Telefonica, S.A. 7899.4b

Bharti Airtel Ltd 1450.2b

Vodafone Group 890.9b

Inmarsat PLC 276.8b

Idea Cellular 224.8b

Name Market Cap

AT&T 182.9b

Verizon 106.4b

BCE 28.1b

Chunghwa

Telecom

24.5b

CenturyLink 12.3b

Current Performance

S&P 500 Telecommunications

1 Day 0.38% 0.22%

1 Month 0.35% 1.71%

3 Month 2.24% 6.50%

YTD 6.56% 4.18%

Business Analysis

Wireless Communications

• Growth

– Strong international

demand for expansion

– Heavy capital expenditure

is required

• Cyclical

– Fluctuates more with

business cycle and the

overall economy

Telecom Services - Domestic

• Mature

– Established networks and

little to no increase in

demand

– Negligible increase in

capital spending

– Workforce eliminations

• Cyclical

– Fluctuates with economy,

but less than wireless

communication

Business Analysis

Supply & Demand

• Ability to develop new markets– 3G market expanding in developing countries

– 4G LTE market in more developed countries

• Demand varies globally– Larger demand increases in developing countries and smaller demand

increases in the more developed countries

– Innovations and advances in technology create new demand

• Possible external factors – Government regulations

Porter’s 5 Forces

Wireless

Communications

Telecom Services –

Domestic

Threat of new entry Low Low

Buyer power Moderate Moderate

Supplier power Moderate Low

Availability of substitutes High High

Competition High High

Economic Analysis

Positive• Population growth – middle class emerging in developing nations

• Consumer confidence

• Per capita income & consumer spending

Negative• Unemployment rate

• Energy Prices – increased costs likely passed on to consumer

Economic Analysis

Real GDP

Economic Analysis

Consumer Confidence

Economic Analysis

Consumer Spending

Economic Analysis

Unemployment

Financial Analysis

Trend (22 years)

Financial Analysis

Revenues

Financial Analysis

EBITDA Margin

Financial Analysis

Net Profit Margin

Financial Analysis

ROE

Financial Analysis

EPS Growth

Valuation Analysis

Trailing P/E: 16.3, 0.93

Valuation Analysis

Forward P/E: 15.6, 0.96

Valuation Analysis

P/B: 1.9, 0.7

Valuation Analysis

P/S: 1.4, 1.0

Valuation Analysis

Relative to S&P500 P/Trailing E P/Forward E P/B P/S P/CF

Sector (Current) 1.2 1.2 0.8 0.9 0.5

Sector (Median) 0.93 0.96 0.7 1.0 0.5

Wireless Com. (C) NA NA 0.8 1.0 0.5

Wireless Com. (M) 1.4 1.5 0.6 0.8 0.6

Telecom Serv.-Dom. (C) 0.95 1.0 0.8 1.0 0.5

Telecom Serv.-Dom. (M) 0.85 0.88 0.8 1.0 0.5

NIHD (C) 1.2 1.2 0.9 0.9 0.8

NIHD (M) 1.4 1.2 2.7 1.7 1.1

VZ (C) 1.1 1.1 1.2 0.7 0.5

VZ (M) 0.73 0.78 0.9 0.8 0.4

AT&T (C) 0.89 0.93 0.7 1.1 0.6

AT&T (M) 0.82 0.86 0.7 1.4 0.6

Conclusion

• This sector is slightly overvalued according to

the ratios

• NIHD is definitely cheap right now; VZ vs. AT&T

• Foresee growth in wireless telecom, especially

in emerging markets; Little to no growth in

wireline segment

Recommendation

• Increase SIM holding by 31 basis points to bring

it to 4.5%

• Possible reallocation within the SIM

Telecommunication Sector: VZ vs. AT&T

Q&A