Total Access Communication Public Company Limited (DTAC, BBB/AA(tha)/Positive), the second-largest operator, is likely to come under pressure as it continued to lose revenue market share in both voice and non-voice services to market leader Advanced Info Service Public Company Limited (BBB+/AA+(tha)/Stable) and TrueMobile over the past year. In 1Q15, DTAC’s revenue market share in voice was 28.2% and non-voice was 29.5%, falling from 29.3% and 32.9%, respectively, in 1Q14.
Fitch expects revenue in the saturated voice market to contract by 10%-15% in 2015 (2014: 12% contraction). The competition will remain intense as TrueMobile aims to gain market share in the upcountry, where voice services still dominate. This upcountry strategy has helped TrueMobile narrow the gap with the top two; TrueMobile’s voice revenue market share improved by 190bp yoy to 17.7% in 1Q15 at the expense of AIS and DTAC, which saw their voice revenue market share fall by 50bps and 140bps respectively during this period.
Fitch expects all operators to continue to compete aggressively on data pricing and handset promotions to increase data usage, which will be the industry’s key growth driver in the medium term. AIS is likely to benefit most from rising data usage given its superior network quality. AIS invested heavily in its 3G network over the past two years, and has strengthened its competitive position in non-voice service even though it does not offer 4G services. AIS’s non-voice revenue grew strongly by 33.7% yoy in 1Q15, faster than the industry’s 26.7% expansion; its non-voice revenue market share improved by 260bp to 50.5% in 1Q15 from 47.9% in 1Q14.
Although TrueMobile has narrowed the gap on market share with its competitors, its earnings and profitability will remain significantly weaker than that of its peers. This is mainly due to the company’s relatively higher costs due to its smaller size and high marketing expenses. TrueMobile’s EBITDA margin (net of network rental revenue) was weak at 12.2% for the 12 months to March 2015, compared with 44% for AIS and 33% for DTAC.
We do not expect DTAC’s weakening market share to have an immediate impact on its credit ratings, which already take into account higher competition and investment. DTAC’s operating cash flow will remain solid and it has high rating headroom. The company’s strategy is to compete on network quality rather than price. Fitch believes that the company will continue to benefit from regulatory cost saving as it migrates subscribers to the 3G licence system from the 2G concession system.
The Positive Outlook on DTAC continues to reflect Fitch expectation that the company should be able to maintain strong earnings and financial leverage of below 1.5x (end-1Q15: 1.4x). However, before upgrading DTAC to ‘BBB+/AA+(tha)’, we would expect the company’s operating EBITDAR margin to improve to over 40% on sustained basis (12 months to March 2015: 35%). The Positive Outlook indicates that these conditions may be met within two years.