(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
-- 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
-- The stable outlook reflects our expectation that DBA will
maintain adequate financial buffers to support its debt-funded
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
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
-- 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
-- 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
-- 2008 Corporate Criteria: Analytical Methodology, April
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/--