Fitch expects mobile service revenue at the three telcos - Advanced Info Service Public Company Limited (AIS; BBB+/AA+(tha)/Stable), Total Access Communication Public Company Limited (DTAC; BBB/AA(tha)/Stable) and True Corporation Public Company Limited’s (True Corp; unrated) mobile group - which account for most of the market, to remain weak in 2H14. Although economic conditions are likely to improve, voice revenue will remain under pressure due to intense competition in a saturated market. Consumers will also continue to replace traditional voice calls and short message service with cheaper over-the-top applications, such as Facebook, Twitter, Skype, Line and WhatsApp, which are delivered via mobile data networks.
Fitch expects the mobile operators’ marketing costs to remain high in 2014 and 2015 as the companies are likely to continue to promote smartphone adoption and subscriber migration to third-generation (3G) mobile networks. However, the increase in marketing costs will be offset by a reduction in regulatory costs as more subscribers migrate to the 3G platform. Hence we expect the mobile telcos’ EBITDA margins to improve by 1pp-3pp in 2014. In 1H14, aggregate EBITDA margin for the industry increased to 34.7% from 31.9% a year earlier.
Free cash flow is like to be negative for the major mobile operators in 2014 and 2015 principally due to high capex required to build out the 3G networks. Financial leverage will increase during the period but Fitch’s ratings already incorporate the likelihood of low EBITDA growth and a decline in credit metrics.
The largest two operators, AIS and DTAC, have plenty of ratings headroom, which provides them with sufficient financial flexibility during this investment cycle.
The total voice revenue of AIS, DTAC and True Corp’s mobile groups fell 10.7% yoy in 1H14. This was mainly due to weaker economic activity as Thailand’s GDP shrank by 0.5% in 1Q14, although growth picked up to 0.4% in 2Q14. Data revenue rose by 28.2% yoy in 1H14, offsetting the drop in voice revenue and resulting in stable service revenue - excluding interconnection charges - in 1H14.
Despite intense competition in 1H14, the three largest mobile operators were able to maintain their market positions, with AIS accounting for 52% of the market by service revenue, DTAC 31% and True Corp’s mobile group 17%.