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Fitch: Chinese Telcos Consolidation Unlikely in Next Two Years

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Consolidation in the Chinese telecoms industry is unlikely within the next one or two years, as the profitability of smaller operators has not deteriorated to a level that would foster industry restructuring, says Fitch Ratings.

Instead, smaller operators may seek more collaboration - including network sharing - to save capex and improve efficiency. Industry consolidation may happen at a later stage if these measures cannot strengthen smaller operators' competitive positions and profitability.

Even if there is consolidation in the near term, Fitch does not expect China Mobile's and China Telecom's credit profiles to be significantly impaired. The most likely restructuring will involve a non-cash merger between China Telecom and China Unicom or a non-cash acquisition of CUHK by China Telecom. The resulting combined entity could see large cost synergies on mobile and broadband services.

Fitch expects that smaller operators China Telecom and China Unicom will continue to face higher competition from China Mobile. The licensing of fourth-generation (4G) time-division long-term evolution (TD-LTE) technology to China Mobile since end-2013 has helped China Mobile regain some of the market position it lost in the 3G era. At end-3Q15, 4G users accounted for 30% of China Mobile's mobile subscriber base, compared with 23% for China Telecom. China Unicom has been losing mobile subscribers in 2015, and its EBITDA dropped 2% yoy in 3Q15.

In addition, China Mobile should start offering fixed-mobile bundling to compete with China Telecom and China Unicom after acquiring fixed-line operator China TieTong Telecommunications Corporation (TieTong) from its parent. The acquisition should not significantly affect China Mobile's financial profile, given its strong net cash position. China Mobile will pay CNY32bn cash and assume CNY2bn net debt for the stake in TieTong. The acquisition is scheduled for completion by end-2015.

Fitch believes that the CEO reshuffling at China Telecom and China Unicom in August 2015 points to the government's longer-term goal to improve the efficiency and profitability of smaller operators. To achieve the goal, we expect China Unicom will adopt a more aggressive strategy in 2016 in 4G network rollout, fibre network expansion and marketing spending to improve its network and service quality. We also expect China Unicom and China Telecom to explore more extensive mobile and fibre network-sharing opportunities in addition to tower-sharing as mandated by government.

Network-sharing could be an attractive alternative to industry consolidation; achieving large cost synergies; and could represent a step-by-step approach to an ultimate merger at a later stage. However, network-sharing may delay industry consolidation. We believe that industry consolidation can achieve higher cost savings, as China Unicom and China Telecom could combine retail operations as well as wholesale and network operations. However, government may believe that the benefits of having three competitors outweigh such cost savings.

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