Fitch: China's Telco Rate Changes Will Not Achieve Goals

Mon Jan 6, 2014 12:53am EST

(The following statement was released by the rating agency) HONG KONG/SYDNEY, January 06 (Fitch) Fitch Ratings says that China's Ministry of Industry and Information Technology's (MIIT) latest cut in mobile interconnection rates, announced on 23 December 2013, will be insufficient to achieve its goal of creating a level playing field by redistributing profits from China Mobile Limited (CML, A+/Stable) to smaller operators. Fitch believes that CML will retain its strong market leadership position as we estimate that the proposed changes will reduce EBITDA by just 3%. The EBITDA of the second-largest operator, China Telecom Corporation Limited (CTCL, A/Stable), will likely rise by 3%. We believe these changes in themselves will not be material to the companies' market positions and credit ratings, although CML's ratings headroom will be reduced. With effect from 1 January 2014, the mobile interconnection rate that CTCL and third-largest operator China Unicom (Hong Kong) Limited (CUHKL) pay to CML for most calls will be reduced to CNY0.04/minute. However, the rate that CML pays to CTCL and CUHKL will be maintained at CNY0.06/minute. In addition, the settlement rates for short messaging services (SMS) and multimedia messaging services (MMS) would also be reduce to CNY0.01/message and CNY0.05/message respectively. Fitch expects competition to partially offset the potential benefits to CTCL and CUHKL, and put further pressure on CML's profitability. The cut in the mobile interconnection rate payable by CTCL and CUHKL will lower their average cost for voice traffic and may lure them to reduce tariffs to gain market share. In 1H13, the average mobile voice revenue per minute for CTCL was CNY0.10, and CNY0.08 for CML. However, we do not expect a price war, as CTCL and CUHKL focus more on mobile data than the traditional voice business. Competition from over-the-top (OTT) operators, which provide voice, messaging and other content and services over the internet, is another rating driver. Fitch forecasts that CML's revenue growth will slow, and profitability will remain under pressure due to intensifying OTT substitution. In 1H13, CML still received 69% of its revenue from traditional voice and SMS services, which tend to command higher margins but have higher substitution risk. We expect EBITDA, at best, to remain stable, as margins will continue to decline. For CTCL, Fitch expects its operating EBITDA margin to remain steady over the next two years, driven by steadily rising mobile market share and improvement in subscriber quality. However, stiffer broadband competition may constrain margin improvement. We believe that CTCL will also pass on benefits from the cut in interconnection rate to customers. We do not expect CTCL to deleverage in the next two years and its higher 4G capex will keep its funds flow from operations-adjusted net leverage at around 1.4x in 2014. CML dominates China's telecoms industry, accounting for 53% and 57% of the industry's service revenue and EBITDA, respectively, in 1H13. CML had a 62% share of China's mobile subscribers in October 2013, though the company has been put at a disadvantage in 3G technology as it was tasked to roll out the locally developed 3G technology, which is less mature and less competitive. Contacts: Kelvin Ho Director +852 2263 9940 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Steve Durose Senior Director Head of APAC TMT Ratings +61 2 8256 0307 Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: iselle.gonzalez@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on 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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