The Outlook revision reflects Fitch's expectation that the regulatory environment for the telecom industry in Thailand will improve after the completion of 3G spectrum auction on 16 October 2012. This will enable DTAC to migrate its operation and subscribers to the new licence system which, unlike the current concession agreement, does not have pending legal and regulatory issues. Currently, DTAC operates its mobile service under the concession agreement which is exposed to legal and regulatory uncertainty including a pending investigation of past concession amendments and the concession expiry date.
The agency notes that spectrum allocation should boost DTAC's network capacity and support rapid growth in mobile data traffic over the medium term. Fitch expects non-voice revenue for the Thai mobile sector to continue to grow by 30%-35% per annum over the next two years. The potential growth in non-voice revenue should help offset slower growth in traditional voice service.
However, Fitch points to potential legal challenges to, and investigations into, the 3G auction and the final auction price. There were criticisms from the public that the auction rules discouraged competitive bidding leading to final auction prices that are close to the start price. Fitch believes that the successful issuance of 3G licences and more clarity on the impact from the legal challenges or investigations should help address these concerns.
Fitch expects profit margin of major mobile operators to fall over the next two years due to a likely increase in competition. Operators are likely to target a fast migration of their operations and subscribers to the new licence system, so the agency expects companies will be more aggressive in offering incentives to existing and new subscribers. Nevertheless, Fitch believes telecom operators could benefit from lower regulatory cost in the long run, after the bulk of the subscriber base connects the new networks.
The high licence fee and additional investment cost for the 3G network will lead to an increase in net debt and financial leverage for DTAC over the next three years, but Fitch believes that its solid cash flow generation and large rating headroom should help the company absorb the effect of any significant negative free cash flow. At end-9M12, DTAC's funds flow from operations (FFO)-adjusted net leverage was healthy at 0.68x.
What Could Trigger A Rating Action?
Positive: Future developments that may, individually or collectively, lead to an upgrade of DTAC's ratings include
-A smooth migration to a new licence system
- FFO-adjusted net leverage below 2.5x on a sustained basis
Negative: Future developments that may, individually or collectively, lead to a revision of Outlook to Stable include
-Heightened uncertainty regarding the legal challenges to the auction process which could affect the migration process to the new licence system or lead to cancellation and prolong the auction