Fitch Ratings: Taiwanese Telcos' Leverage to Worsen on Spectrum Payments
14/02/2020 03:27
(The following statement was released by the rating agency) Fitch Ratings-Hong Kong-February 13: Taiwanese telcos' financial leverage is likely to worsen as telcos are set to pay large 5G spectrum costs and will likely increase capex to roll-out 5G services in 2020-2021, says Fitch Ratings. The local 5G spectrum auction, which is conducted in two phases, saw aggressive bids by all Taiwanese telcos in the first phase, which drove spectrum cost on the 3.5GHz band to USD0.71 per MHz per capita, 80% more expensive than the USD0.40 per MHz per capita in Italy, which until now had the most expensive 5G spectrum globally. The spectrum price is likely to increase after the completion of the second phase of bidding, which is due to be completed by end-February 2020 and involves the sale of premium locations within the 3.5GHz spectrum band. We expect Taiwan Mobile Co., Ltd.'s (TWM, AA(twn)/Stable) 2020 and 2021 FFO adjusted net leverage to worsen to 2.9x and 2.7x, respectively, assuming the company funds the potential spectrum payment of TWD31 billion entirely by debt. We also expect its capex to rise to TWD11 billion (2019 estimate: TWD7.1 billion) to launch 5G services. TWM's leverage could improve if the company decides to reduce its large dividend payments of around TWD15 billion a year or chooses to sell, in full or in part, its 698 million of treasury stocks worth TWD75 billion at the current equity price. Fitch's exposure draft on its Lease Rating Criteria for non-financial corporates, published on 30 January 2020, proposes - for the majority of corporate sectors - to treat leases as operating expenses rather than capitalising them in debt as they are currently. Should the proposals in the exposure draft be adopted as criteria, TWM may gain some rating headroom as lease adjustments are more significant to its credit metrics than for many peers. For example, the difference between TWM's lease-adjusted FFO net leverage and unadjusted FFO net leverage is about 1.0x and TWM's lease-equivalent debt represents around 40% of total debt. The proposed criteria change follows the introduction of the IFRS 16 and ASC 842 accounting standards under IFRS and US GAAP, respectively. Four telcos in Taiwan, including market leader Chungwha Telecom (CHT), TWM, Far EasTone Telcommunications and Taiwan Star Telecom, won spectrum in the 3.5GHz band, which is best suited to provide 5G services in terms of coverage and capacity. We expect all telcos to launch 5G services during 3Q20. We forecast industry average revenue per user (ARPU) to grow by 3% each in 2020 and 2021, as we expect telcos to introduce higher-priced 5G tariff plans to move customers to 5G speeds. However, the resulting improvement in cash generation will be insufficient to offset the increase in debt to fund the large spectrum dues. The launch of 5G services in April 2019 in South Korea has improved industry growth prospects. We expect the revenue of SK Telecom Co., Ltd (A-/Negative) and KT Corporation (A/Stable) to grow by 4%-5% in 2020 and operating profit to improve as we forecast ARPU to increase by 4%-5% and 20%-30% of subscribers to convert to 5G by end-2020. TWM demonstrated a prudent monetisation strategy and solid execution during the 4G roll-out in mid-2014. Its 2015 telecom revenue and EBITDA grew by 2% and 4%, respectively, driven by conversion of 43% of its post-paid subscribers to 4G by the year's end, post-paid ARPU growth of 3% and contained handset subsidies. 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