Fitch Affirms Taiwan Mobile at 'AA(twn)'; Outlook Stable
12/11/2018 08:38
(The following statement was released by the rating agency) Fitch Ratings-Hong Kong-November 12: 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 senior unsecured rating and the rating on its third issue of domestic senior unsecured notes at 'AA(twn)'. KEY RATING DRIVERS Solid Market Position: TWM's ratings reflect Fitch's expectation that the company will maintain its solid market position over the medium term. TWM remains as Taiwan's second-largest mobile operator, with market share of about 28% by service revenue in 1H18, despite competition from smaller operators. The company is also the fourth-largest multiple-system operator in the cable TV market, holding nationwide market share of 11%; it is the dominant cable TV operator in all five of its operating regions. Its 45.01%-owned (after the announced retirement of treasury shares by end-2018) momo.com Inc. is the market leader in Taiwan's business-to-consumer e-commerce market. Near-Term Profitability Pressure: We expect TWM's TWD499 SIM-only unlimited offering and continued mobile termination rate cuts to pressure EBITDA in 2018 and 2019. However, it should maintain stable profitability and cash generation over the medium term, as we expect the company to preserve profitability via cost-rationalisation efforts, new value-added services and cross-selling across its telecom, content and internet services. Its average revenue per user trend should gradually stabilise, as most of the demand for low monthly fee SIM-only plans was met from the TWD499 SIM-only campaign, but a quick reversal is not feasible in light of the prolonged handset replacement cycle. Low Capex: We expect low capex to offset cash flow pressure from stiffer price competition to boost pre-dividend free cash flow (FCF); TWM has cut its 2018 capex budget to TWD7.4 billion (2017: TWD8.5 billion). Excluding spectrum fees, we expect capex to remain at the lower level until at least 2020, as the 4G network utilisation rate is still low. Mobile capex will mainly relate to the deployment of new spectrum in the 2100 megahertz band acquired in last year's auction for 4G services. Cautious on 5G Capex: We expect TWM, along with other Taiwanese mobile operators, to adopt a prudent approach in its 5G network rollout, as the 5G business model is still immature; it remains unclear whether 5G deployment will utilise a consumer focused or enterprise-centric model. We do not expect a sharp increase in 5G-related capex immediately after the 5G spectrum auction and forecast a lower unit cost per megahertz per user under the 5G spectrum compared with the 4G spectrum, based on general trends in other countries. Bidding competition may also be mild, as smaller operators may face funding difficulties and some industry participants have suggested 5G network sharing. Modest Leverage, but Low Headroom: We expect TWM's FFO adjusted net leverage to trend down to 2.5x or below in the next few years, from 2.6x in 2017. Nevertheless, we forecast lower rating headroom as the company is likely to maintain its generous dividend payments, despite lower reported earnings, and the SIM-only unlimited data plan may constrain operating cash flow generation until mobile users start changing their smartphones. However, improved pre-dividend free cash flow generation due to lower capex should enhance TWM's ability to manage leverage. DERIVATION SUMMARY TWM's credit profile benefits from Taiwan's stable telecom and cable TV markets. Short term EBITDA may be affected by accounting changes and the introduction of the TWD499 SIM-only unlimited plan. Operating cash flow has been holding up and we expect it to remain stable. We believe TWM has a stronger business profile compared with peers rated on the national scale, such as ASE Technology Holding Co., Ltd. (ASEH, A+(twn)/Stable), due to its solid position as the second-largest operator in Taiwan's stable telecom industry. ASEH faces higher business risk in the competitive global outsourcing semiconductor assembly and testing industry. Its net leverage ratio is lower than that of TWM, but its leverage can deteriorate rapidly as it operates in a capital-intensive and highly volatile technology industry that can deplete cash quickly. KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer - Low single-digit yoy revenue decline in 2H18 and 1H19 before rebounding slightly from 2H19 - Consolidated operating EBITDA margin of 25%-27% in 2018-2021 (2017: 28%) - Capex/sales ratio of 7% before 5G spectrum costs in 2018-2021 (2017: 16%) - Annual cash dividend payment maintained at current levels in 2018-2021 RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action Positive rating action is not probable in the medium-term without a sustained change in market dynamics in favour of TWM. Developments that May, Individually or Collectively, Lead to Negative Rating Action - Sustained decline in EBITDA - Significant M&A that negatively affects TWM's operations or business profile - Sustained FFO adjusted net leverage of over 2.5x (2017: 2.6x) LIQUIDITY Adequate Liquidity: TWM has established and solid domestic banking relationships and proven access to domestic capital markets, which should allow the company to refinance its debt obligations. TWM had readily available cash of around TWD5.9 billion at end-September 2018, after paying TWD15.2 billion in dividends in 3Q18. This compares with TWD15.2 billion in short-term borrowings, current portion of long-term borrowings and TWD2.4 billion of short-term notes and bill payables. However, we expect post-dividend FCF to exceed TWD5 billion over the next 12 months. In addition, unused committed banking facilities amounted to TWD60.7 billion. Contact: Primary Analyst Kelvin Ho Director +852 2263 9940 Fitch (Hong Kong) Limited 19/F., Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Dan Wang Associate Director +852 2263 9996 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023785 Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10024585 National Scale Ratings Criteria (pub. 18 Jul 2018) https://www.fitchratings.com/site/re/10038626 Additional Disclosures Solicitation Status https://www.fitchratings.com/site/pr/10051177#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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