Fitch Affirms China Telecom at 'A'; Outlook Stable

Wed Mar 27, 2013 2:04am EDT

(The following statement was released by the rating agency) HONG KONG/SYDNEY, March 27 (Fitch) Fitch Ratings has affirmed China Telecom Corporation Limited's (CTCL) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'A'. The Outlook is Stable. Key Rating Drivers Strong fixed-line market position: The ratings reflect CTCL's commanding fixed-line subscriber position and scale of operations in China. Fitch expects CTCL to maintain its near-monopoly operator status in southern China for fixed-line and broadband services. Strong mobile execution: CTCL has a solid execution ability with its mobile business despite disadvantages of the code division multiple access (CDMA) technology. Its mobile service revenue rose 36% in 2012 and, as a share of the Chinese mobile market, expanded to 11.9% (2011: 9.8%). Fitch believes that CTCL is capable of making further market share gains over the next two years. Positive mobile strategy: Fitch believes CTCL's mobile strategy is on track to ensure a healthy long-term credit profile, although at the expense of short-term profitability. High handset subsidies required to win market share in a competitive market will continue to exert pressure on margins in the short term. However, margins should rebound in 2013 or 2014 due to cost savings from network rentals after its CDMA network acquisition. Capex to increase: The ratings also take into consideration an expected increase in capex. CTCL budgeted a 39.6% increase in its capex for 2013 to CNY75bn as it starts to undertake mobile capex following its CDMA network acquisition. However, cost savings in network rentals are likely to help cover most, if not all, of its mobile capex increases. Moderate leverage: Fitch expects CTCL's funds from operations (FFO)-adjusted net leverage ratio to remain below 2x in the next two years, after taking 4G capex into account. CTCL may start 4G capex in 2014. Fitch expects a gradual 4G network rollout, focusing on high-traffic hotspots. Solid liquidity and flexibility: CTCL's CNY33bn cash position at end-2012 comfortably covered CNY17bn current debt (total debt CNY100bn). Unutilised committed credit facilities were CNY163bn at end-2012. Also, 62% of its total debt was payable to its parent company. Rating Sensitivities Negative: Future developments that could individually or collectively lead to negative rating actions include - FFO-adjusted net leverage above 2x on a sustained basis - EBITDAR margin below 30% on a sustained basis Positive: Due to CTCL's smaller mobile market share relative to its major competitors', as well as its likely lower profitability and higher capex, a rating upgrade is unlikely in the medium term. Contact: Primary Analyst Kelvin Ho Director +852 2263 9940 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Cosmo Zhang Director +852 2263 9696 Committee Chairperson Steve Durose Senior Director +61 2 8256 0307 Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com. The issuer did not participate in the rating process other than through the medium of its public disclosure. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable criteria, Corporate Rating Methodology, dated 8 August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research Corporate Rating Methodology here Rating Telecom Companies here 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.