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Fitch Ratings: Competition to Weigh on Thai Telcos# Profitability

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Bangkok--13 Feb--Fitch Ratings

The latest quarterly results of two major Thai telecom operators signal a challenging outlook for the sector amid intense competition, says Fitch Ratings. The agency expects domestic telcos to embark on aggressive marketing activities, which are likely to put further pressure on profitability, notably for the third-largest operator, Total Access Communication Public Company Limited (DTAC; BBB/AA(tha)/Stable).

The largest telecom operator, Advanced Info Service Public Company Limited (AIS; BBB+/AA+(tha)/Stable) and DTAC both reported a decline in mobile revenue growth and EBITDA on the back of unlimited data plans. AIS's mobile-service revenue growth in 2018 decelerated to 1.3% from 3.3% in 2017, while the mobile-service revenue of DTAC declined by 0.7%, compared with 0.7% growth in 2017. Aggressive marketing promotions, including handset subsidies, resulted in AIS's EBITDA declining by 2% yoy in 4Q18, while that of DTAC fell by 23%.

Fitch expects the challenging operating environment to continue in 2019. We believe DTAC could become more aggressive in its offerings as the company is determined to win back market share. This is likely to offset any savings from the company's cost-optimisation plans. DTAC's earnings will also be affected by the payments to CAT Telecom Public Company Limited for equipment rental and TOT Public Company Limited for use of the 2.3GHz spectrum. We expect DTAC's EBITDA margin to decline to 36.5% in 2019 from 37.8% in 2018, while AIS's strategy to only provide handset subsidies in some geographical areas is likely to limit the impact on its EBITDA margin.

Fitch expects DTAC's market position to strengthen in 2019 after acquiring 1.8GHz and 900MHz spectrums. This should help plug the gap in its spectrum portfolio and network quality that has constrained its competitiveness over the past few years. Nevertheless, meaningful network improvements and brand re-building may take effect only after a few more quarters, suggesting EBITDA recovery will probably take place only in 2020. This should allow it to maintain leverage within Fitch's negative rating guideline of 2.5x. DTAC's financial leverage was 2.0x in 2018.

AIS should continue to benefit from its strategy to diversify its telecoms business into fixed broadband. Its fixed-line broadband has shown greater stability and growth prospects than mobile over the past few years. We expect the continued growth in overall service revenues, the visibility of operating cash flows and the more moderate capex to allow the company to manage leverage at a level that is commensurate with the current ratings in the medium term. AIS's free cash flow is likely to turn positive in 2019 due to lower spectrum payments and falling capex following the completion of the massive build-out of its 3G/4G networks. This should result in a reduction of FFO adjusted net leverage to around 1.5x-1.6x in 2019, from 1.7x in 2018, giving AIS more rating headroom and financial flexibility to support an increase in marketing expense.


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