We believe Thailand has moderate competition with wireless penetration of more
than 100%. However, we anticipate that competition could intensify after all
three companies--including AIS--in Thailand's telecommunications market launch
3G services on their recently acquired licenses. We believe AIS will receive
the spectrum by about mid-January next year.
AIS' operating performance in the nine months ended Sept. 30, 2012, is better
than our expectation, with revenue increasing 10.8% to Thai Baht (THB) 103.4
billion. Performance improved because revenue from the voice business
continued to grow and non-voice revenue rose 33%. An increase in mobile data
users and data usage aided growth in the non-voice segment. The company's
EBITDA margin remains strong, and fairly stable, at 45%.
We view AIS' financial risk profile as "modest." We expect the company's
financial ratios to remain strong for the rating. Its ratio of funds from
operations (FFO) to debt has always remained above 75%, and its debt-to-EBITDA
ratio has not gone above 1x over the past five years. We expect this trend to
continue even after AIS pays 50% of the 3G license cost of THB14.6 billion and
the related capital expenditure. Our financial ratios include our conservative
adjustment for AIS' guarantees to government-owned telecommunications company
TOT Public Co. Ltd.
AIS' capital expenditure was low over the past three to four years. However,
we expect capital expenditure to increase significantly with AIS winning the
3G license. We believe the company has more than enough cash flow to
accommodate additional 3G-related capital expenditure. We expect this
expenditure to be about THB50 billion over the next three years.
Thailand continues to have above-average regulatory risk, although we believe
the risk is moderating, particularly after the much delayed 3G license
auction. Uncertainty still surrounds the conversion of existing
concessions--some of which expire next year--into licenses. For example, a
concession agreement of an AIS subsidiary that holds spectrum in the 1,800
megahertz (Mhz) band expires in September 2013. The regulator plans to auction
this spectrum early next year to address the expiry of concessions.
We believe 3G licenses could help telecom companies grow and improve their
profitability in the next three to four years. This is because the companies
can provide higher-value 3G services, and the license fee for 3G is much lower
than the existing concession fee. However, our expectation assumes that
companies would accrue the benefits after they achieve fair scale in their 3G
subscriber base and that the regulator will not impose tariff control, which
AIS, like other telecommunications companies in Thailand, also faces risk from
various legal disputes. Most of AIS' disputes are with TOT. However, the risk
partly reduced in 2011 with TOT withdrawing its claim for THB37 billion of
compensation from AIS for two revenue sharing agreements where the percentages
were reduced several years ago, allegedly to benefit AIS.
Standard & Poor's base-case scenario for AIS indicates the company's financial
ratios will remain strong with the debt-to-EBITDA ratio at less than 1.0x and
the FFO-to-debt ratio above 85% over the next three years. Our forecast
considers the increase in the company's debt in 2013 and 2014 due to negative
discretionary cash flow. Our projections are based on the following
-- Revenue would grow by about 8% in 2012 and the growth rate will fall
to about 5% in 2014 based on our expectation that: (1) subscribers will
continue to grow by 7% in 2012 and that growth will fall to 3% in 2014; (2)
voice average revenue per user (ARPU) would decline by about 2% annually; and
(3) non-voice ARPU would grow by about 15% for the next two years.
-- EBITDA margin will be stable at about 44.5%.
-- Capital expenditure will increase to 24% of revenue (excluding handset
sales) in 2013 and 19% of revenue in 2014, from 7% of revenue in 2012.
-- The payment for the 3G spectrum will be about THB7.3 billion in 2012
and THB3.7 billion in 2014.
-- The dividend payout ratio will be 110%.
Our assessment of AIS' liquidity is "strong," as defined in our criteria. We
expect the company's sources of liquidity to exceed its uses by more than 1.5x
during the next 24 months. We anticipate that AIS' net liquidity sources will
remain positive even if EBITDA declines by 30%. Our liquidity assessment is
based on the following factors and assumptions:
-- As of Sept. 30, 2012, liquidity sources include cash and short-term
investments of about THB22.5 billion and unused credit facilities of US$275
-- Sources also include our projected FFO of at least THB40 billion
-- Uses of liquidity include debt due in the next 12 months of THB8.4
-- Uses also include capital expenditure of THB15 billion, which we
believe is mostly for the rollout and maintenance of the 3G spectrum, our
assumption of THB7.3 billion for the acquisition of 3G spectrum, and our
expectation of dividend distribution of THB15 billion, even in case of stress.
AIS also has significant headroom under its covenants.
The stable outlook reflects AIS' resilient operating performance and strong
financial credit protection measures. It also reflects our expectation that
the company will manage the ongoing regulatory evolution in Thailand (foreign
currency BBB+/Stable/A-2; local currency A-/Stable/A-2; axAA/axA-1) without a
material deterioration in its competitive position or financial ratios.
We may lower the rating if AIS' debt-to-EBITDA ratio approaches 1.5x. This
could happen if the company's 3G-related capital expenditure far exceeds our
expectation or its operating performance weakens materially. We could also
downgrade AIS if regulatory or legal disputes result in material adverse
effects on the company's operations or financial ratios. The upside potential
is currently limited, in our view, at least until the nature and implications
of the evolving regulations become clearer.