Published on: 21st Aug 2015
Fitch Ratings says that it expects Thai telecommunications companies to continue their aggressive marketing activities, including handset subsidies and unlimited data offerings, which will hinder improvement in profitability through 2H15. The increase in mobile operators’ marketing expenses is likely to offset the significant reduction in regulatory costs.
Weak economic conditions have put pressure on overall service revenue, which was flat in 1H15 compared with a year earlier. Voice revenue in 2Q15 continued to decline for the eighth consecutive quarter, while growth in non-voice revenue, although strong, started to decelerate slightly in 2Q15 as smartphone penetration reached around 50% of the subscriber base at end-2Q15. Aggressive marketing promotions, such as handset subsidies and unlimited data plans, have also constrained operating EBITDAR margin and earnings improvement.
Fitch expects the challenging business environment to continue in 2H15. Operators are likely to aggressively defend or increase market share. The largest operator, AIS, plans to subsidise low- and medium-end 3G handsets more heavily to speed up the migration to its 3G network as its 2G concession will expire in September 2015. The second-largest operator, DTAC, is likely to maintain its handset subsidy programmes and unlimited data tariff offerings through 2H15, as the company is determined to win back market share.
The margin on handset sales for these companies is likely to remain negative and marketing costs likely to rise gradually in 2H15, which will offset the regulatory cost savings stemming from the migration to the 3G licence regime. AIS has revised down its EBITDA margin guidance for 2015 to reflect more aggressive handset subsidies in 2H15. It now expects EBITDA margin to be unchanged from 2014’s 44.7%, compared with previous guidance for EBITDA margin to rise by 100-200bp. DTAC expects its EBITDA margin to decrease to 31%-33% in 2015 from 34.3% in 2014 (previous guidance: flat EBITDA margin yoy) to reflect ongoing competition.
Fitch expects competition in data pricing to ease in 2016 after the telcos are granted the 4G licences and roll out their 4G service. The introduction of 4G could be an opportunity for operators to adjust data tariffs to better monetise the growth of data usage, such as by offering plans based on data used for the new service, rather than the unlimited data plan offered on the 3G service.
Operating EBITDAR margins for AIS and DTAC remain strong and their financial leverage low. The companies are generally well-positioned to cope with competition without having a major rating impact. Downside risks remain, though. Significant higher-than-expected competition that reduces margin and cash flow from operations for a prolonged period would impair these companies’ ability to sustain high levels of investment and dividend payouts without hurting their credit quality.