China Telcos' Credit Metrics to Weaken; Korea Telcos to Stabilise

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Fitch Ratings warns that the credit metrics for Chinese telcos will weaken in 2014 on lower margins and higher capex although this will not be sufficient to threaten their credit ratings. The 2014 credit outlook for Korean telcos is stable as capex will decline and price competition will continue to be lower than in previous years ensuring margins are broadly stable.

China's forthcoming 4G network rollout, the issue of a fixed-line licence to China Mobile, a potential change in interconnection rates and the continuing value-added tax reform will result in higher pressure on China Mobile's and China Telecom profitability and cash generation. However, Fitch expects credit profiles to remain strong and unchanged.

Fitch forecasts China Mobile's revenue growth to slow; and EBITDA, at best, will remain stable in the next two to three years due to intensifying over-the-top (OTT) substitution. China Mobile is the most exposed of the three large operators to this trend of lower-margin data services replacing higher-margin traditional services. China Telecom will be less exposed to such product cannibalisation as mobile data accounts for a higher proportion of its revenue (1H13: 48%).

In Korea, the ratings agency said that it believes that profitability will remain broadly in line with that in 2013, because the Korean regulator will continue to closely supervise the market to prevent price competition from overheating. New subsidy regulation may come into law in early 2014, which should provide an additional disincentive to excessive subsidy-based competition.

SK Telecom and KT Corporation should both generate small - but positive - free cash flow (FCF) in 2014. Mobile average revenue per user (ARPU) should increase as the growth in LTE data services will more than offset the decline in traditional voice services. In addition, we expect lower capex than in 2013, as LTE networks have been completed and payment for frequency can be phased. However, dividends will restrict FCF margins to low-single-digit percentages.

Fitch does not envisage any ratings upgrades to telcos in China or Korea in the medium term. The nature of regulation and competition, continuing capex needs and shareholder requirements will prevent any major improvement in business or financial risk.

In China they believe that the credit outlook for telcos would only turn negative if regulatory intervention became broader in scope, cut deeper into margins or required much higher investment. In Korea, the credit outlook could turn negative if regulatory scrutiny of price-based completion eased and operators returned to the position where they needed to sacrifice margin through tariff cuts or subsidies to protect market share.

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