(The following was released by the rating agency)
Link to Fitch Ratings' Report: 2013 Outlook: China and Korea Telecommunications
SYDNEY/SEOUL/SINGAPORE, November 26 (Fitch) Fitch Ratings said in a special report released today that the rating headroom for Korean telcos will remain low in 2013 due to ongoing weaknesses in operating margins. However the outlook for the Chinese telco sector is stable with no significant change expected in credit metrics next year.
For Korea, significant marketing expenses for high-end long-term evolution (LTE) subscriber acquisitions will offset the positive impact from average revenue per user (ARPU) improvement. Meanwhile, Fitch forecasts that financial leverage will improve slightly - through positive free cash flow generation - due to lower capex following the substantial completion of LTE-related investments in 2012. Despite the expected improvement in leverage, negative rating action may occur in 2013 should operating margins fall further from 2012's levels.
Continuing improvement in the supply of low-cost smartphones should drive a modest growth in revenue for Chinese telecom operators. Competition and handset subsidies should increase, but Fitch does not expect operators to lose pricing discipline. Both China Mobile Limited (China Mobile, 'A+'/Stable) and China Telecom Corporation Limited (China Telecom, 'A'/Stable) will continue to demonstrate solid performance.
Overall, Fitch expects China Mobile to sustain its strong net cash position, and China Telecom's funds flow from operations (FFO)-adjusted net leverage to remain stable even after the acquisition of the code division multiple access (CDMA) network from its parent. However, acceleration of the LTE licensing process may lead to higher capex which may threaten these companies' credit metrics.
The report provides further details on Fitch's view of demand, growth drivers, competition, capex and regulation for Korea and China telcos. The report, 2013 Outlook: China and Korea Telecommunications China Solid, Korea Weakening', is available on www.fitchratings.com or by clicking on the link above.