(The following was released by the rating agency)
-- DBA's intelligent self-service business is exposed to competition from alternative service providers, revenue concentration in pre-paid phone cards, execution risk in expansion, and regulatory uncertainty.
-- The company's adequate financial buffer and good efficiency due to its integrated business model temper these risks.
-- We are assigning our 'BB-' long-term corporate credit rating and our 'cnBB+' Greater China regional scale rating to the China-based manufacturer and operator of intelligent self-service payment terminals. We are also assigning our 'BB-' and 'cnBB+' ratings to the company's proposed senior unsecured notes.
-- The stable outlook reflects our expectation that DBA will maintain adequate financial buffers to support its debt-funded growth strategy.
On Jan. 11, 2013, Standard & Poor's Ratings Services assigned its 'BB-' long-term corporate credit rating and its 'cnBB+' long-term Greater China regional scale rating to DBA Telecommunication (Asia) Holdings Ltd., a China-based manufacturer and operator of intelligent self-service payment terminals. The outlook is stable. At the same time, we assigned our 'BB-' long-term issue rating and 'cnBB+' rating to the company's proposed senior unsecured notes.
The rating on DBA reflects our view of the exposure of the company's intelligent self-service (ISS) business to competition from alternative payment service providers and regulatory uncertainty. The execution risk in DBA's aggressive nationwide expansion plan and revenue concentration in pre-paid phone cards also weigh on the rating. The company's adequate financial buffers and good efficiency due to its integrated business model temper these risks. We assess the company's business risk profile as "weak" and its financial risk profile as "significant," as our criteria defines these terms.
The sustainability of DBA's ISS business is untested, in our opinion. The ISS business faces stiff competition from substitute payment services, such as bank automated teller machines (ATM) and convenient chain stores. These services are less prevalent in China than in more developed markets, such as Hong Kong and Taiwan, but are growing rapidly. In addition, the ISS business is subject to high regulatory uncertainty. Any adverse change in the government's policy to further liberalize the market or change the scope of business could materially affect DBA. Nevertheless, the company is the first non-financial company licensed to provide e-payment services nationwide through its connection with the payment and settlement system of UnionPay, a bank card, in China.
DBA is exposed to revenue concentration risk in selling phone cards through its ISS business. Sales of these cards accounted for nearly 84% of the company's revenue and 53% of EBITDA for the first six months of 2012. The growth of DBA's ISS business outpaces that of its information technology (IT) business, which manufactures payment terminals, phone booths, and ATM booths. We estimate that sales from phone cards, including mobile phone cards and international calling cards, will continue to comprise more than 90% of total cards sold in 2013. However, we expect still-strong growth in China's mobile communication demand to temper the risk.
DBA's plan to increase the number of self-service payment terminals to about 50,000 across China over the next three to four years is aggressive, in our opinion. Our view is based on: (1) our expectation that the company will fund its expansion primarily through debt; (2) DBA's untested operation and management capacities because the company has never grown at such a high speed before; and (3) the challenges of varying regulatory requirements and consumer acceptance for DBA's products and services across China. The high flexibility in the implementation of the plan reduces the execution risk, in our opinion.
We expect DBA to generate adequate profits to support the rating over the next one to two years, partly due to the IT business. Revenue generation at the company's IT business is, however, volatile, given the reliance on the capital investment plans of telecommunication operators. Nevertheless, DBA's strong internal demand for its nationwide ISS network expansion should help the company to weather volatility in demand and maintain adequate utilization at its manufacturing facilities over the next one to two years. Further, we anticipate that government policy will support renewal demand for phone booths.
We believe DBA's low leverage provides adequate buffer for the company's planned capital expenditure and the risk of lower returns from business expansion over the next one to two years. DBA's ratio of debt to EBITDA was a low 0.1x in the first half of 2012, and it had bank loans of Chinese renminbi (RMB) 80.95 million as of June 30, 2012. In our base-case projection, after factoring in the bond issuance the company plans in 2013, we expect the company's debt-to-EBITDA ratio to rise to about 1.8x in 2013. We estimate the ratio of funds from operations (FFO) to debt to fall to about 40.0% in 2013 from 630.1% at the end of 2012. Both ratios are likely to improve in 2014.
Our base-case projection incorporates the following assumptions:
-- DBA will maintain double-digit growth in 2013, following our expectation of about 30.0% growth in 2012.
-- We anticipate average revenue per terminal will decrease, primarily due to lower average revenue per new terminal during the rapid network expansion. However, the addition of a high number of new terminals to the network and our expectation of stable performances for the IT business will partly offset the lower average revenue per terminal.
-- We expect DBA's gross margins from its IT manufacturing business to stay at more than 35% in 2013. The overall EBITDA margin will likely decline to about 8% in 2013 from 8.9% for the six months ended June 30, 2012, given the increasing share of ISS revenues. -- Capital expenditure will be about US$100 million-US$150 million in 2013, mainly for expanding the self-service terminal network.
We assess DBA's liquidity profile as "adequate," as defined under our criteria. We expect the company's sources of liquidity to cover uses by more than 1.2x in the next 12 months. Our liquidity assessment incorporates the following factors and assumptions:
-- Liquidity sources mainly comprise the company's cash balance of RMB600 million as of the end of 2012 and average FFO of about RMB580 million in the next 12 months.
-- Liquidity uses primarily include working capital outflows of RMB500 million.
-- We factored in only part of the company's planned capital investment of about RMB800 million in 2013. This is primarily because the expansion plan is not committed and will be highly scalable. We expect the company to significantly scale back its expansion plan if its planned bond issuance does not proceed.
-- We anticipate that DBA's net liquidity sources will remain positive even if EBITDA declines by more than 15%.
The stable outlook reflects our expectation that DBA will maintain adequate financial buffers, including debt leverage of less than 2.0x, to support its debt-funded growth strategy. We anticipate high double-digit revenue growth over the next 12 months, which the company's aggressive expansion plan supports. In our base case, we also anticipate a healthy profit margin for DBA's IT business, which will likely provide more than one-third of the company's operating cash flows in the next 12 months.
We could lower the rating if DBA's growth and profitability are materially weaker than our expectation or if the company undertakes a more aggressive expansion plan than we anticipate. A deterioration in credit protection measures, such that debt leverage approaches 2.5x, would indicate such weakness.
An upgrade is unlikely in the coming one to two years due to DBA's revenue concentration in pre-paid phone cards and the perceived threat of rapid growth for other substitute services providers. We could raise the rating if DBA demonstrates that its business model is sustainable by achieving better diversification. Reducing the portion of pre-paid phone card sales or increasing profit contribution from e-payment business would indicate such improvement.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business And Financial Risks In The Retail Industry, Sept. 18, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
DBA Telecommunication (Asia) Holdings Ltd.
Corporate Credit Rating
Greater China Regional Scale cnBB+/--/--
DBA Telecommunication (Asia) Holdings Ltd.
Senior Unsecured cnBB+
Senior Unsecured BB-
New Rating; CreditWatch/Outlook Action
DBA Telecommunication (Asia) Holdings Ltd.
Corporate Credit Rating BB-/Stable/--