TEXT-Fitch: Limited Impact on Thai Mobile Operators from 3G Auction

Thu Aug 9, 2012 11:16pm EDT

(The following was released by the rating agency)

BANGKOK/SINGAPORE, August 10 (Fitch) Fitch Ratings has said in a special report that the upcoming 3G spectrum auction (2.1GHz band) in Thailand is unlikely to have negative impact on the credit ratings of Thai mobile phone operators. Fitch rates Advanced Info Service Public Company Limited (AIS, 'BBB+'/'AA(tha)'/Stable) and Total Access Communication Public Company Limited (DTAC, 'BBB-'/'A+(tha)'/Stable).

The high licence fee and additional investment costs for the 3G network will lead to an increase in net debt and financial leverage for the major mobile operators over the next three years, but Fitch believes that these companies' solid cash flow generation and large rating headroom should help them absorb the effect of any significant negative free cash flow. At end-Q112, AIS's and DTAC's funds flow from operations-adjusted net leverage was healthy at 0.02x and 1.07x respectively.

The agency notes that the issuance of 3G licences in October 2012 could prove a positive step in regulatory and policy frameworks, as private telecom operators move away from concession schemes which have been prone to regulatory, policy and legal uncertainties. These include the pending reviews of concession amendments, tighter restriction on foreign-ownership laws and concession expiration.

The report also notes that the spectrum allocation should boost private operators' network capacity and support the rapid growth in mobile data traffic in the medium term. Fitch expects non-voice revenue of the Thai mobile sector to continue to grow by 30%-35% per annum over the next two years. The potential growth in non-voice revenue should help offset the slower growth in traditional voice service.

On the other hand, the agency expects profit margins of the major mobile operators to fall over the next two years due to a likely increase in competition. The operators are likely to target a fast migration of their operations and subscribers to the new licence system, so the agency expects companies will be more aggressive in offering incentives to existing and new subscribers. Nevertheless, Fitch believes the telecom operators could benefit from lower expected regulatory costs in the long run, after the bulk of the subscriber base connects to the new network.

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