CTCL’s revenue grew 11.5% yoy in 2011, along with a significant improvement in revenue structure, due to robust growth across mobile and fixed-line data services. Non-fixed-line voice revenue as a proportion of total revenue increased to 79.7% in 2011 from 71.6% in 2010. Mobile services accounted for 33.7% of revenue in 2011 (2010: 24.5%) and Fitch expects the company to maintain its subscriber and market share growth over the next two years.
Fitch expects pressure on CTCL’s EBITDA margins to continue, albeit easing year by year, due to high subscriber acquisition and retention costs required to win and to maintain market share in an increasingly competitive market. Notably the availability of the iPhone on CTCL’s network starting March 2012 will increase handset subsidy expenses, but at the same time assist CTCL in gaining high-end customer market share from its competitors.
The ratings also take into consideration an expected increase in capital expenditure in 2012 and 2013, as CTCL continues to upgrade its broadband network and plans to purchase the code division multiple access mobile network from its parent, China Telecommunications Corporation (CTC), by end-2012. Fitch expects CTCL’s funds from operations (FFO) adjusted net leverage ratio as of end-2012 to increase on account of new debt required to fund the mobile network acquisition before reversing in 2013 due to higher FFO generation and removal of the mobile network capacity leasing fee at 28% of its CDMA service revenues per year.
Fitch may consider a negative rating action if CTCL’s FFO adjusted net leverage increases beyond 2.0x, or its EBITDAR margin falls below 30%, both on a sustained basis. A positive rating action may be considered if FFO adjusted net leverage decreases below 1.0x on a sustained basis.