At the same time, Fitch has affirmed Advanced Wireless Network Company Limited's (AWN) National Long-Term Rating at 'AA+(tha)' with Stable Outlook. A full list of rating actions is at the end of this commentary.
KEY RATING DRIVERS
High Investment, Low Headroom: Fitch believes that AIS, which won 1.8GHz and 900MHz spectrum in the November 2015 and May 2016 auctions, will be able to support the investment in the medium term, although its credit metrics are likely to deteriorate, reducing its rating headroom. AIS's debt will increase to finance the high spectrum fee and capex for network expansion, and its financial leverage is likely to deteriorate in the medium term. Free cash flow will be negative as cash flow from operations is unlikely to cover capex (including spectrum costs) and dividend payouts. Fitch estimates AIS's FFO-adjusted net leverage will rise to 1.5x-2.0x (excluding THB96.7bn for spectrum licences payable as of May 2016) over the next four years from 1.0x at end-2015.
Lower Regulatory Uncertainty: AIS faces less regulatory risk as the company migrates its operations and subscribers to the licence regime, which has a clearer regulatory, policy and legal framework compared with the concession system. However, AIS needs to pay high upfront spectrum costs, which offset the benefits of the annual regulatory fee, which is lower than revenue-sharing costs under the concession regime. The lower regulatory risk should help support AIS's overall credit profile, despite its weaker financial metrics.
Stronger Position in Data: AIS will continue to benefit from an increase in data usage due to its superior network quality. The company has heavily invested in its 3G network over the past three years. It started to roll out its 4G network in December 2015, which strengthened its data service quality. Fitch believes the acquisition of the 900MHz spectrum in May 2016 will help strengthen its competitive position in the data segment by boosting the network capacity and help the company to roll out its network more efficiently.
Slow Revenue Growth: Fitch expects AIS's revenue in 2016 to grow at a low single-digit rate. Strong growth in data revenue will continue, but will be offset by the structural decline in legacy voice and short-message service (SMS) revenues. In 1Q16, AIS's service revenue dropped by 0.5% to THB30.1bn, from THB30.3bn in 1Q15.
Competition Weighs on Profitability: Fitch expects Thai telecommunications companies to continue their aggressive marketing activities over the next two years, including handset subsidies and offering unlimited data or large data packages, which could hinder improvement in profitability. The increase in marketing expenses and handset subsidy costs are likely to offset the significant reduction in regulatory cost.
Weaker 2016 Earnings: Fitch expects AIS's operating EBITDAR to decline by 11% to around THB64bn in 2016. The decline would be mainly a result of the potential one-off expenses relating to the 2G to 3G subscriber migration, principally handset subsidies. In 1Q16, AIS migrated 5 million 2G customers to its 3G network. Fitch believes that the handset subsidy cost could be reduced after AIS won the 900MHz spectrum in May 2016 and continues its 2G service. The 2G to 3G migration process is likely to continue but on a more gradual basis, which could help spread out the migration costs. As of March 2016, the company has spent THB3.4bn on handset subsidies.
Leading Market Position: AIS has maintained its leading market position as the largest mobile phone operator in Thailand by service revenue over the past several years. Fitch believes that AIS should be able to maintain its service revenue market share of greater than 50% over the medium term (2015: 52.7%). The company benefits from economies of scale due to its large subscriber base. AIS's market position is also supported by its strong brand and extensive network coverage.
AIS-AWN Ratings Equalised: The ratings of AWN are equalised with those of AIS to reflect the strong links between AWN and AIS, in line with Fitch's Parent and Subsidiary Rating Linkage criteria. AIS owns 100% of AWN and fully controls the subsidiary's management and operations. AWN was awarded 2.1GHz and 1.8GHz licences and won the auction for 900MHz spectrum in May 2016. AWN is of strategic importance to its parent as the operator of AIS's licensed business.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for AIS include:
- Low single-digit revenue growth in 2016 and 2017
- Operating EBITDAR margin in 2016 to fall to 41% (2015: 46.6%) due to one-off handset subsidy costs to migrate 2G subscribers to its 3G network and gradually improve from 2017 onwards
- Payment under partnership agreement with TOT
- THB30bn-40bn a year network capex in 2016 and 2017
- Payment of spectrum cost during 2016-2020 after the company won the spectrum bidding for 1.8GHz in November 2015 and 900MHz in May 2016
- High dividend payout
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- An increase in FFO-adjusted net leverage above 2.0x on a sustained basis (Fitch's previous guideline: 1.5x)
- Unfavourable regulatory changes
The revision in the leverage guideline reflects our view that AIS's regulatory risk has reduced, underscored by the lower concession risk and 2G to 3G migration risk.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Sustained positive free cash flow
- Operating EBITDAR margin above 45% on sustained basis (2015: 46.6%)
However, positive rating action is unlikely over the next 12-24 months due to the likely increase in financial leverage.
FULL LIST OF RATING ACTIONS
Advanced Info Service Public Company Limited
- Long-Term Foreign-Currency IDR affirmed at 'BBB+'; Outlook Stable
- Long-Term Local-Currency IDR affirmed at 'BBB+'; Outlook Stable
- National Long-Term Rating affirmed at 'AA+(tha)'; Outlook Stable
- National Short-Term Rating at 'F1+(tha)'
Advanced Wireless Network Company Limited
- National Long-Term rating affirmed at 'AA+(tha)'; Outlook Stable
- National Short-Term rating affirmed at 'F1+(tha)'
- National senior unsecured rating affirmed at 'AA+(tha)'