Fitch Street View: Investor Q&A - APAC Tech & Telecoms

Tue Mar 19, 2013 7:01pm EDT

(The following statement was released by the rating agency) SYDNEY, March 19 (Fitch) Fitch Ratings says that ongoing decline in Korean telcos' margins could result in rating downgrades, and that the gap in credit strength between the top four and the smaller operators in Indonesia is likely to widen. In India, regulatory pressures remain on Bharti Airtel (BBB-/Negative), albeit softening, and that in China, Baidu, Inc.'s (A/Stable) ownership structure is stronger than some other variable interest equity (VIE) arrangements. These were among the key points Fitch made at recent round-table meetings with credit investors based in Hong Kong and Singapore. Fitch's feedback to investors' key questions is set out below. Q: What is your view on the Korean telecom sector, why is SK Telecom (SKT, A-/Stable) rated a notch below KT Corporation (KT, A/Stable), and how does Fitch view KT's interest in Maroc Telecom? In the last 5-10 years we have seen many European telcos migrate from the mid-'A' category to the 'BBB' category. Given the level of competition and margin decline in Korea, there is a risk that this market may go the same way as some of those European markets. Currently rating headroom for the Korean telcos is low. We downgraded SKT to one notch below KT following its acquisition of Hynix Semiconductor (SK Hynix, BB/Stable), not only because credit metrics weakened but also because we thought that the acquisition was a poor strategic fit and that the risk of another creditor-unfriendly deal has increased. Any deal KT does to acquire a stake in Maroc Telecom will weaken its credit profile. However, Fitch is treating this potential acquisition as event risk. That is, if the deal proceeds, the extent of any downgrade, if any, will depend on the details of the transaction, including financing. However KT's ratings headroom is currently low. Q: What is your view on the Indian telecommunications sector, and why do you rate Bharti investment-grade? We have had a negative outlook on this sector for a number of years now. India has been the toughest major telecoms market in the region for both operators and investors due to a high level of competition leading to low prices and an unstable regulatory and legislative framework. Bharti's 'BBB-' rating reflects its leading position in the Indian market and a likely winner in the medium term. The Negative Outlook continues to reflect ongoing regulatory uncertainty in its Indian operations relating to a one-time charge for excess spectrum (over 6.2MHz) and spectrum refarming. However, the charges are now likely to be phased over the life of the licence, rather than paid up-front, which will aid Bharti's deleveraging efforts. Difficulties faced by smaller telcos are likely to lead to some exiting the market or scaling back operations which we expect to strengthen the larger operators' pricing power. While Bharti's African operations are developing slower than the company's initial expectations, their position as the number two player in large African markets and number one in smaller markets provides a platform for this business. The geographical diversification to some extent mitigates the high sovereign-risk environment. Q: What is happening in the South-East Asia telecoms markets? Not all SE Asian markets are the same. In Singapore and the Philippines we are expecting margins to decline this year, but leverage should improve as capex is likely to be lower than in 2012 in both countries. In Malaysia most telcos are likely to maintain their operating EBITDAR margins this year due to stable voice tariffs and rising data revenue. Malaysian wireless telcos' free cash flow (FCF) margins will remain robust as capex will stay low. In Indonesia, the dominant top four operators will generate adequate cash from operations (CFO) to support continued high capex. For 2013 these companies' revenue will rise by the mid-single digits, and operating EBITDAR margins will remain above 50%. Smaller telcos will continue to be weak amid declining tariffs, low profitability and stretched balance sheets. Fitch is positive on the credit outlook for the Thai telecom sector based on our expectation that the operators will be less exposed to policy and regulatory risks following the issuance of 3G licences. Technology upgrades to 3G should also support growth in non-voice revenue, given an improvement in data network quality. Credit metrics may deteriorate due to high capex and licence fees, but we believe the two largest mobile operators, Advanced Info Service Public Company Limited (BBB+/Stable) and Total Access Communication Public Company Limited (BBB-/Positive), have sufficient headroom in their ratings. Q: Why do you rate Baidu at 'A'? Is Baidu's VIE mechanism not a risk and how does Fitch look at these structures? Baidu's leading position in the Chinese internet search market will enable it to generate strong cash flows even if its market share and margins decline, as we expect. The prospects for organic growth are strong as China's internet penetration is currently low and we expect on-line advertising to increase its share compared with TV and print media. We assess VIE structures on a case-by-case basis. For Baidu, we took comfort from the fact that over 70% of revenues come from (and almost all cash and assets are held within) wholly owned subsidiaries rather than contractually controlled, consolidated entities. In addition, there is ownership alignment between Baidu and Baidu Netcom (the VIE entity). There remains a risk that Baidu's control over Baidu Netcom could be lost due to breach of contract by the equity owners of Baidu Netcom, or via government regulation/interference. However, we believe, first, that founding chairman's (Robin Li) equity control over both Baidu, Inc. and Baidu Netcom mitigates the ownership risk. Second, Fitch believes the company's beneficial relationship with the Chinese government mitigates the regulatory risk. Contacts: Steve Durose Head of TMT Ratings, Asia Pacific +61 2 8256 0307 Matt Jamieson Head of APAC Research, Corporate Ratings Group +61 2 8256 0366 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available at www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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