Fitch: Most Asian Telcos to Come Under Pressure in 2017

Fiercer competition and rising capex needs will put pressure on the credit profiles of most Asian telcos over the next year, says Fitch Ratings. We have a negative outlook on the telecoms sectors in India, Singapore, Malaysia, Thailand and the Philippines. Korea, Indonesia, China and Sri Lanka are all on stable outlook.

Competition is likely to intensify in India, Singapore and Malaysia, with new entrants poised to offer cheaper tariffs to poach customers from incumbents. Competition could be the most intense in India, where a well-capitalised new entrant, Reliance Jio, is offering free voice and text services and cheaper data tariffs than the incumbents. We expect the blended tariff to decline by 5%-6% for Indian telcos. In Malaysia, the fixed-line market leader, Telekom Malaysia, is making a move into the wireless market, which will prevent a recovery in the revenue of wireless incumbents next year. Finally, Singapore will soon auction sufficient spectrum to allow the entry of a fourth mobile network operator.

 

Rising competition will add to pressure on revenue, which Fitch expects to grow by just 0-5% in most Asian telco markets in 2017. Data usage will continue to rise strongly, but most telcos are pricing data in such a way that increased usage is not translating into similar revenue growth. The trend of falling data tariffs and the substitution of data for voice and text will continue in most markets. Fixed-line and international long-distance services are in a structural decline. China is the only market where we expect higher data usage to translate into growth in average revenue per mobile user.

Weak revenue growth will result in a hit to the profit of most Asian telcos. EBITDA margins are likely to shrink the most in the Philippines and India, where telcos still derive the majority of their revenue from voice and text services. Chinese and Korean telcos' profitability will remain stable, reflecting weaker competition and lower marketing and handset subsidy costs. Chinese telcos will benefit further from lower tower lease rental costs.

Rising capex needs will mean that many Asian telcos will have minimal-to-negative free cash flow next year. Thai, Philippine and Indian telcos are likely to have the highest capex/revenue ratios, at around 28%-30%, as they strengthen 4G networks in response to fast-growing data consumption and the rising importance of network quality. In contrast, Chinese telcos' capex could decline by 10% as their 4G development cycle has peaked.

We expect industry consolidation in India, Indonesia and Sri Lanka, as weaker telcos exit the market or seek M&A to strengthen their competitive position. The Sri Lankan market looks particularly crowded and ripe for consolidation. Debt-funded M&A could threaten the ratings of acquirers in these markets.

Among the Fitch-rated Asian telcos, Singapore Telecom (A+/Stable), Telekom Malaysia Berhad (A-/Stable), Reliance Communications (BB-/Stable), Global Cloud Xchange (B+/Stable) and PT Tower Bersama Infrastructure Tbk (BB/Stable) have low ratings headroom.

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