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Fitch Affirms Taiwan Mobile at 'AA(twn)'; Outlook Stable
November 14, 2017 / 7:37 AM / 3 days ago

Fitch Affirms Taiwan Mobile at 'AA(twn)'; Outlook Stable

(The following statement was released by the rating agency) SEOUL/HONG KONG, November 14 (Fitch) Fitch Ratings has affirmed Taiwan Mobile Co., Ltd.'s (TWM) National Long-Term Rating at 'AA(twn)' and National Short-Term Rating at 'F1+(twn)'. The Outlook is Stable. The agency has also affirmed TWM's unsecured debt class rating at 'AA(twn)'. A full list of rating actions is at the end of this release. KEY RATING DRIVERS Solid Market Positions: Fitch expects TWM continues to maintain its strong market positions over the medium term. The company is Taiwan's second-largest mobile operator with about 29% of market revenue in 9M17. In the cable TV market, TWM is the fourth-largest multiple-system operator, holding a nationwide subscriber market share of about 11%. It is the de-facto cable TV monopoly in its five operating regions. Its 45%-owned momo.com Inc. is ranked among the top three companies in the online shopping and TV home shopping businesses. Solid Profitability, Cash Generation: The ratings reflect Fitch's expectation that TWM will continue to maintain healthy profitability and operating cash generation over the medium term. We expect the improvement in EBITDA margin to be enough to compensate for contraction in revenue in the short term due to a decrease in roaming revenue from Asia Pacific Telecom Co., Ltd and mobile termination rate cut. We expect EBITDA margin to improve in 2017 given lower handset subsidies and controlled commission costs. In 9M17, TWM's telecoms EBITDA margin increased to 36.9%, from 35.8% in the same period in 2016. Solid Non-Telecom Operations: TWM's cable TV and e-commerce businesses continue to be healthy, benefitting from solid market positions, scale and growing market size. Competition in the cable TV market in New Taipei County is likely ease because new entrants, such as New Taipei City Cable TV Co., Ltd and DigiDom Cable TV Co., Ltd, , have ceased their cheaper plans. We expect TWM's e-commerce business through momo.com to continue to achieve double-digit revenue growth, although their contribution to TWM's profit generation is limited to a single digit because of lower margin compared with the telecom and cable TV businesses. Capex to Decline: Fitch expects a meaningful reduction in TWM's capex from 2019, as the mobile capex cycle peaked during 2017-2018. The closure of the 2G network by end-June 2017 will reduce maintenance capex and operating expenditure. We also expect cable TV capex to taper off from 2018 after the major digitalisation upgrade of its cable TV system in 2016-2017. We do not expect Taiwan to rush to issue 5G licences. Consequently, we expect TWM to enjoy a period of moderate capex with solid cash flow from operations (CFO). We forecast TWM's FFO-adjusted net leverage ratio to improve from 2018 after an increase in 2017 due to spectrum acquisition costs. Lower-Than-Expected Spectrum Fee: TWM's will pay TWD8.6 billion for spectrum acquisition, compared with our expectation of TWD10 billion-15 billion), which is likely to lead to a stronger balance sheet and lower leverage than our previous forecast. TWM secured four blocks in the 2100MHz frequency band, which the company needs to maintain 3G services that account for 28% of its subscribers. TWM is likely to fund the spectrum cost with bank loans and this will raise its FFO-adjusted net leverage ratio to 2.6x in 2017. However, CFO generation is likely to help the company deleverage 18-24 months after the auction at the end of October 2017, particularly as industry capex is declining. DERIVATION SUMMARY TWM's credit profile benefits from Taiwan's relatively stable telecoms and cable TV markets, where profitability is a key focus for operators. Compared to peers rated on the national scale, such as Advanced Semiconductor Engineering, Inc. (ASE, A+(twn)/Rating Watch Negative), we believe TWM has a stronger business profile due to its solid market position as the second-largest telecom operator in Taiwan's stable telecommunications industry. ASE faces substantially higher business risk in a competitive outsourcing semiconductor assembly and testing industry. ASE's leverage ratio is lower than that of TWM, but its leverage can deteriorate quickly because it operates in a capital-intensive and highly volatile technology industry that can deplete cash quickly. In addition, we forecast TWM's leverage to improve from 2018 while ASE's leverage ratio is likely to increase after its planned M&A. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for TWM include - revenue to grow by low single digits from 2018 after a decline in 2017 due to mobile termination rate cut and drop in roaming revenue. - stable EBITDA margin at around 30% due to controlled handset subsidies and customer acquisition costs. - capex to stabilise in 2018-2019. - annual cash dividend payment maintained largely at the current level in 2017-2018 RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Negative Rating Action - sustained decline in EBITDA - significant M&A that has a negative effect on the operations or business profile - sustained FFO adjusted net leverage of over 2.5x (2016: 2.4x) Positive rating action is unlikely in the medium term without a sustained change in market dynamics in favour of TWM. LIQUIDITY Adequate Liquidity: TWM has well-established and solid banking relationships in Taiwan and proven access to domestic capital markets, which should allow the company to refinance its debt obligations. TWM had unrestricted cash balance of around TWD6.0 billion at end-September 2017. This compared with TWD21.9 billion in short-term debt and the current portion of long-term debt. However, unused committed bank facilities amounted to TWD55.9 billion. FULL LIST OF RATING ACTIONS Taiwan Mobile Co., Ltd. National Long-Term Rating affirmed at 'AA(twn)'; Outlook Stable National Short-Term Rating affirmed at 'F1+(twn)' Unsecured class rating affirmed at 'AA(twn)' The third issue of domestic unsecured bonds affirmed at 'AA(twn)' The fourth issue of domestic unsecured bonds affirmed at 'AA(twn)' Contact: Primary Analyst Shelley Jang Director +82 2 3278 8370 Fitch Ratings Australia Pty., Korea Branch 9F Kyobo Securities Building 97, Uisadang-daero, Yeoungdeungpo-Gu Seoul, Korea Secondary Analyst Kelvin Ho Director +852 2263 9940 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. 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