March 30, 2017 / 1:51 AM / 4 months ago

Fitch: Chinese Telcos' Capex Cuts Offset Tariff, Dividend Pressure

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(The following statement was released by the rating agency) HONG KONG/SYDNEY, March 29 (Fitch) The continued decline in Chinese telecoms operators' capex in 2017 should lead to improved free cash flow (FCF), despite the increase in dividend payout and another round of government-directed tariff cuts, Fitch Ratings says. We expect further capex cuts in 2018, as we expect operators to continue to trim 4G investment, and 5G capex is likely to be limited before 2020. In 2017, we forecast China Mobile Limited's (CML, A+/Stable) FCF margin will be 5%-10% and China Telecom Corporation Limited's (CTCL, A+/Stable) FCF to turn to positive. Although we expect CML and CTCL to raise their dividends, the increase in their total cash dividends in 2017 is likely to be less than CNY5.5 billion, compared to combined capex cuts of about CNY19 billion. Chinese telecoms operators cut their capex budgets for 2017 by 13% yoy to CNY310 billion. CML cut its 2017 capex by 6% to CNY176 billion while CTCL trimmed its budget by 8% yoy to CNY89 billion. China Unicom (Hong Kong) Limited (CUHKL) slashed its 2017 capex budget by 38% to CNY45 billion. We forecast further capex cuts in 2018. We expect the strategic alliance between CTCL and CUHKL on network sharing plus CTCL's 800MHz re-farm for 4G use to result in more meaningful capex savings from 2018. CTCL made only a modest capex budget cut in 2017 as it plans to complete re-farming the entire network by adding 200,000 800MHz base stations in 2017. The re-farming should improve CTCL's 4G network coverage and also lay a good network foundation to deploy voice over long-term evolution (VoLTE) and narrowband internet of things (NB-IoT). CUHKL should be able to enjoy the benefits from the 800MHz re-farm and we expect it to remain disciplined on investment in 2018 as it may reserve resources for future 5G capex. We believe the majority of China's 5G capex is some years away; investment may start to kick in from 2019 at the earliest, but initial 5G spending is likely to be limited and focus on trial networks, and perhaps core networks instead of radio access networks. In addition, 5G capex is likely to be constrained until the business case for 5G becomes clearer. For instance, if 5G is to be used as an extension of existing networks, the rollout may be more concentrated in high-traffic hotspots. If 5G is to cater for machine communication, providing connectivity for IoT devices for low-power, wide-area applications, we believe amount of 5G capex under this case should be manageable. However, if 5G is to be deployed mainly for highly reliable, low-latency communications to enable mission-critical machine communications, such as autonomous driving, the potential network capex could be so enormous that a large portion of CML's considerable net cash of CNY425 billion could be consumed. Unlike previous generations, we do not expect China to lag behind its Western counterparts in 5G deployment. Globally, we expect 5G technical specifications to be finalised in 2018-2019, with the first commercial deployments by 2020 and mainstream deployment of 5G services likely in 2022-2025. However, we believe a number of 5G trials will take place ahead of final specifications to provide real-world feedback on 5G specification development. We also expect 4G/LTE and 5G to coexist for the foreseeable future, as they will complement each other in coverage and capacity. Capex savings in 2017 should help mitigate the negative impact from government-directed tariff cuts. Under the government's "Speed Upgrade and Tariff Reduction" policy, the three Chinese operators have pledged to substantially cut internet private-line access tariffs for small- and medium-sized enterprises and international long-distance tariffs. They will also from 1 October 2017 cease to charge domestic long-distance tariffs and roaming fees on mobile subscribers. We believe this round of government-directed tariff cuts is less severe than the previous round in 2015. The directive may reduce operators' revenue and EBITDA in the short term, but favourable price elasticity should relieve profitability pressure over the longer term. Contact: Kelvin Ho Director +852 2263 9940 Fitch (Hong Kong) Limited 19/F., Man Yee Building 68 Des Voeux Road Central, Hong Kong Steve Durose Managing Director Corporates +61 2 82560307 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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