Fitch Affirms Taiwan Mobile at 'AA(twn)'; Outlook Stable
08/11/2019 08:56
(The following statement was released by the rating agency) Fitch Ratings-Hong Kong-November 08: 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 Moderate Leverage: We forecast TWM's 2019 FFO adjusted net leverage to improve to around 1.9x-2.0x, as TWD7.7 billion of convertible bondholders decided to convert the debt into equity. Leverage is likely to increase again in 2020 to around 2.2x-2.4x as we expect capex to rise significantly on 5G spectrum payments. However, we believe the current ratings have sufficient headroom to accommodate 5G spectrum payouts of about TWD13 billion-15 billion. We expect TWM to manage its leverage through improving operating cash flow by upselling bundled plans and prudent capex investment in the medium term. This is despite near-term pressure on the mobile business. Solid Market Position:TWM's ratings reflect our view that it will maintain a solid market position over the medium term. TWM remains Taiwan's second-largest mobile operator, with service revenue market share of 27% in 1H19 (1H18: 28%), despite competition from smaller operators. The company is also the fourth-largest multiple-system operator in the cable-TV market, holding a nationwide subscriber market share of 11%; it is the dominant cable-TV operator in all five of its operating regions. Its 45%-owned momo.com Inc. is the largest business-to-consumer e-commerce service provider in Taiwan. Capex to rise on 5G: We forecast 2020 capex to increase to around TWD22 billion-23 billion (estimated 2019: TWD7.1 billion, 2018: TWD8.5 billion), driven by the upfront payment for 5G spectrum scheduled for auction in December 2019. We expect the bidding process to be at least moderately competitive, given the limited 270MHz bandwidth offering on 3.5GHz band. We believe TWM should secure 80MHz-100MHz of bandwidth on 3.5 GHz for seamless 5G experience. However, competition could ease if financially distressed small operators agree on spectrum sharing. We expect TWM, along with other Taiwanese mobile operators, to adopt a prudent approach for 5G capex, in light of the limited business case. Excluding spectrum fees, we expect telecom cash capex to remain stable at 13% of service revenue in 2020-2021 (2018: 13%). We believe that telcos are likely to deploy 5G networks in the major cities first rather than targeting a nationwide coverage. 5G to Reverse ARPU Decline:The commercialisation of 5G telecom networks in Taiwan is likely to drive a rebound in wireless average revenue per user (ARPU), mobile service revenue and total EBITDA in the medium term. We expect TWM to reverse its ARPU trend, with 1% growth in 2021 (2020: 5% decline likely) by migrating subscribers to upscale handset bundled plans, driven by the handset replacement cycle following 5G rollout. We also expect TWM to maintain robust EBITDA and pre-dividend free cash flow (FCF) generation in light of its cost-reduction efforts and new value-added service offerings. Derivation Summary TWM's credit profile benefits from Taiwan's relatively stable telecoms and cable-TV markets. We believe TWM has a stronger business profile due to its solid position as the second-largest telecoms operator in Taiwan's stable telecoms industry, compared with peers rated on the national scale such as ASE Technology Holding Co., Ltd. (ASEH, A+(twn)/Stable). ASEH faces higher business risk in a highly competitive global outsourcing semiconductor assembly and testing industry. ASEH's net leverage ratio is lower than that of TWM, but the leverage can deteriorate swiftly because it operates in a capital-intensive and highly volatile technology industry that can deplete cash quickly. Key Assumptions - Mid-single-digit revenue growth in 2019-2020 (2018: 1%) driven by growth in Momo - Blended mobile ARPUs to decline by around 14% and 5%, respectively, in 2019 and 2020. - Pre-IFRS operating EBITDAR margin to narrow to 25%-28% during 2019-20 (2018: 30%) - Capex/operating revenues ratio to decline to 5% in 2019 (2018: 7%) and jump to 17% in 2020 on payment for 5G spectrum assets - Annual cash dividend payment maintained at current levels in 2019-2020 - Payment for 5G spectrum assets of about TWD13 billion-15 billion in 2020 RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Positive rating action is unlikely 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 MA that has a negative effect on the operations or business profile - Sustained FFO adjusted net leverage of over 2.5x Liquidity and Debt Structure Adequate Liquidity: TWM has well-established and solid banking relationships in Taiwan and proven access to the domestic capital markets, which should allow the company to refinance its debt obligations. At end-June 2019, TWM's available cash of TWD6.8 billion and unused committed banking facilities of TWD69 billion were sufficient to fund TWD8.7 billion in short-term debt and the current portion of long-term debt. Taiwan Mobile Co., Ltd.; National Long Term Rating; Affirmed; AA(twn); RO:Sta ; National Short Term Rating; Affirmed; F1+(twn) ----senior unsecured; National Long Term Rating; Affirmed; AA(twn) Contacts: Primary Rating Analyst Jia Wen, Associate Director +852 2263 9627 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68 Des Voeux Road Central Hong Kong Secondary Rating 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@thefitchgroup.com; Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: alanis.ko@thefitchgroup.com. 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