Fitch Affirms China Mobile at 'A+' With Stable Outlook

Mon Apr 7, 2014 11:37pm EDT

(The following statement was released by the rating agency) HONG KONG/SEOUL/SYDNEY, April 07 (Fitch) Fitch Ratings has affirmed China Mobile Limited's (CML) Long-Term Foreign-Currency and Local-Currency Issuer Default Rating (IDR) at 'A+' with Stable Outlook. KEY RATING DRIVERS Dominant Mobile Market Position: The ratings reflect CML's leading position in China's mobile market and strong financial position. Fitch expects CML to maintain its dominant position over the medium term due to economies of scale, its robust financial position and its solid execution ability. In 2013, CML's mobile service revenue market share remained high at 69% compared with 72% in 2012. At end-February 2014, its mobile subscriber and 3G subscriber shares were 62% and 48% respectively. 4G Opportunity: We believe that the licensing of fourth generation (4G) time division long-term evolution (TD-LTE) technology and Apple's launch of TD-LTE-enabled iPhones will help CML make up some lost ground. CML's 3G business has been hindered by the inferiority of its time division synchronous code multiple access (TD-SCDMA) technology compared with its competitors' global 3G technologies. The TD-LTE ecosystem is stronger than that of TD-SCDMA, and this should strengthen CML's customer retention ability and data revenue generation. OTT Substitution Risk: Fitch expects that the 4G licensing will also bring higher competition from both telecoms companies and over-the-top (OTT) operators. In 2013, CML still received about 67% of its service revenue from traditional voice, short message service and multimedia messaging service, which tend to command higher margins but have greater substitution risk. Its voice revenue declined for the first time in 2013 by 3.4% yoy. Rising Margin Pressure: While CML's margins remain high compared with global peers', we forecast that service revenue growth will slow, and margins will come under rising pressure in the next two to three years due to higher customer retention costs and intensifying OTT substitution. Selling expenses and handset subsidies increased over 13% yoy in 2013, outpacing service revenue growth of 5.4%. EBITDA fell 5.2% yoy in 2013, while the reported service EBITDA margin contracted to 40.7% from 45.3% in 2012. VAT Reform Burden: The ratings take into consideration CML's likely higher tax burden as China continues its value-added tax (VAT) reform. It is likely that China will implement VAT rates of 11% and 6% for basic telecoms services and value-added services (VAS) respectively - higher than the current 3% business tax. We expect that the VAT reform will raise CML's overall tax burden in the next two to three years and put higher pressure on its EBITDA. However, Fitch believes that the impact of the VAT reform is likely to be short-lived. As VAT is implemented in more industries, CML's profitability should recover due to an expected increase in input VAT credits. Also, we expect that CML will transform its revenue mix, raising VAS to reduce output VAT liabilities. Sizeable Capex: Fitch expects CML to incur higher total capex in the next three years than the previous three years, because the company would have to invest heavily in 4G technology to boost its network quality and data service competitiveness to overcome its 3G disadvantages. CML raised its 2014 capex budget by 22% to CNY225bn. This is after its 2013 capex rose 45% yoy. Fitch expects higher capex to pare pre-dividend free cash flow (FCF) margin to below 10% in the next two years. Ample Liquidity: Fitch expects CML to maintain its strong net cash position, even after considering higher capex, rising margin pressure and additional burden from VAT reform in the next two to three years. CML's liquidity is strong; at end-December 2013 its unrestricted cash balance of CNY420bn significantly exceeded total debt of CNY5bn. Constrained by Sovereign Ratings: CML's ratings are constrained by China's sovereign rating (A+/Stable) as CML is ultimately controlled by the state. CML's standalone rating is 'AA-'. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to a downgrade of the standalone rating to 'A+' include: - reversal of its net cash position - pre-dividend FCF margin falling below 8% on a sustained basis (2012: 21%) - Operating EBITDAR margin falling below 40% on a sustained basis (2013: 46.4%) CML has high rating headroom and Fitch therefore does not envisage a downgrade of the standalone rating to 'A' from 'AA-' over the medium term. As CML's ratings are constrained by the sovereign's rating, any downgrade of the sovereign will lead to a corresponding downgrade in CML's ratings. Positive: Future developments that may, individually or collectively, lead to a positive rating action include: - A positive sovereign rating action Contact: Kelvin Ho Director +852 2263 9940 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Shelley Jang Associate Director +822 3278 8370 Committee Chairperson Steve Durose Senior Director Deputy Head - Asia-Pacific Corporate Ratings Group +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. THE ISSUER DID NOT PARTICIPATE IN THE RATING PROCESS OTHER THAN THROUGH THE MEDIUM OF ITS PUBLIC DISCLOSURE. Applicable criteria, "Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage", dated 5 August 2013, are available at www.fitchratings.com. 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