3G licensing regime positive for players

However, the competitive pressures are likely to increase and free cash flow (FCF) remains negative as telcos transition to the new licensing system, Fitch said.
The national ratings were upgraded for AIS and its thirdgenerationservice subsidiary Advanced Wireless Network (AWN) to “AA+(tha)” from “AA(tha)” and for DTAC to “AA(tha)” from “A+(tha)”.
Obboon Thirachit, Fitch’s Bangkokbased telecom analyst, said yesterday that the upgrades were based on the view that regulatory risks for mobile telcos have improved after the operators were granted the 3G licences.
The rating agency signalled its intention to upgrade these companies in October last year when the regulator completed the 3G spectrum auction. The upgrades last month showed that the benefits of the 3G licence system are now sufficiently certain to be reflected in higher ratings.
The benefits to operators under the new 3G licensing system are many. Private telcos will migrate their operations and subscribers to the new 3G licence system, which is more transparent and promotes a more level playing field than the concessions granted by governmentowned telecom agencies, which governed secondgeneration cellular operations.
Under the licence system, all telcos operate under common rules and regulations, governed by an independent regulator. Operators have been granted the right to operate the telecom frequency for 15 years and have full ownership of their assets. Under the 2G concessions, all network assets have to be transferred to their concession grantors.
The migration to licensing will help reduce private operators’ exposure to the legal and regulatory uncertainties that were characteristic of the concession system, Fitch believes. Such risks included the pending investigation by the government into concessions, which could lead to significant claims by the government and/or the concession grantors, or the revocation of the concession.
These legal and regulatory weaknesses have been Fitch’s key credit concerns for the Thai telecom industry and constrain the ratings of these operators.
Fitch upgraded DTAC’s international ratings, but AIS’s ratings were unchanged. It rated AIS “BBB+” on the international scale and continued to rate it higher than DTAC because of its superior margins and market position.
However, before upgrading AIS’s international ratings to the “A” category, Fitch would expect the company to generate positive FCF and for its new 3G business to account for the dominant share of operating earnings before interest, tax, depreciation, amortisation and restructuring or rent costs. However, it believes these developments are unlikely to take place over the next 1224 months.
Despite the better regulatory environment, tariff competition is likely to increase, as the major operators are likely to target a swift migration of their operations and subscribers to the licence system.
The competition is likely to be intense for |the medium and lowend prepaid segments. Operators may need to offer incentives such as large tariff cuts or handset promotions to accelerate the migration process, which could lead to further price competition and margin decline.
The significant increase in capital expenditures to build the 3G network will also lead to a negative FCF for operators for the next two years, Fitch predicts. Their financial leverage will increase.
The impact from competition and large investment is expected to be manageable for the companies at their current rating levels, mainly because of their solid generation of operating cash flow and large rating headroom, as Fitch’s ratings take into account the higher competition and investment.
The credit profiles of AIS and DTAC are likely to remain commensurate with their current ratings over the next three years, with FFO (funds from operations)adjusted net leverage ratio below 1.5 times and 2.5 times respectively.