Fitch Ratings

Mixed outlook for Asia-Pacific as capex pressures grow

02 November 2020 | Melanie Mingas

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Thailand, Singapore and Indonesia are facing a bumpy end to the year as capex pressures mount for telcos.

Market conditions are expected to remain tough with all three markets showing a negative outlook for free cash flow. Compounding the issue, 5G capex and investment cycles are likely to mute mid-term performance according to analysis released today by Fitch Ratings.

For example, in Singapore, the pursuit of a 5G SA network will place substantial and uneven capex burdens on local players as they move into the 3.5GHz spectrum-band. Fitch said consolidation could become commonplace.

“We believe 5G investment is critical for strengthening the competitiveness of incumbent telcos through product differentiation and network quality, potentially weeding out smaller operators and easing competition in the medium term,” its outlook read.

“TPG Telecom Pte Ltd and mobile virtual network operators are less likely to engage in price competition for 5G, as they depend on incumbent telcos for 5G wholesale services. TPG Telecom, which ended its free trials in March 2020, will need to substantially improve its network and service quality to compete with rivals,” it continued.

In Thailand, Fitch expected sector investment, excluding spectrum payments, to remain high, at around THB75 billion, as AIS and True increased capex to support their 5G rollouts. AIS is rolling out a non-standalone 5G network and planned to launch the service on a commercial basis in Q4 of this year. Meanwhile, DTAC is likely to pace 5G investment over the next few years to preserve balance-sheet strength.

DTAC's 2.3GHz network rollout over the past year has improved its network and increased net subscriber additions, but this may be short-lived as the two largest domestic mobile operators, AIS and True, step up their 2.6GHz network and 5G rollout investments.

Meanwhile in Indonesia, Fitch said 5G rollouts by smaller rivals will prove difficult without scale efficiencies to drive investment feasibility. Indonesia’s new omnibus law – the final draft of which is still be developed – will permit spectrum-sharing of new technology, which should benefit smaller telcos. However, Telkom is expected to retain its market dominance and strong network leadership, as extensive fibre infrastructure becomes an important element of the country’s eventual 5G rollout.

Regional outlook

Taking a more general view, Fitch said asset sales and dividend cuts will provide some financial flexibility to fund near-term capex expansion. Its overall outlook for the sector is stable.

“Fitch Ratings expects a gradual EBITDA recovery and stable leverage for Asia-Pacific (APAC) telecoms, supporting our stable sector outlook for 2021. Telecom operators are likely to bolster cash generation ahead of the 5G investment upcycle, driving rational competition in most markets.

Fitch also said it expected “limited rating changes” for the coming 12 to 18 months, with 14 of its 16 public Foreign-Currency Issuer Default Ratings on a stable outlook. The negative outlooks on Telekom Malaysia Berhad (A-) and Bharti Airtel Limited (BBB-) are sovereign-driven.

“Post the Coronavirus pandemic”, Fitch said the outlook across the APAC region is for “gradual EBITDA recovery, stable leverage and for data monetisation to take centre stage”.

“Telcos are likely to bolster cash generation ahead of the 5G investment upcycle, supporting stable competition in most markets,” the report continued.

Trends to watch

In its report, Fitch highlighted five trends it said are likely to emerge over the course of the next year. These are:

  • Resumption of data revenue growth, following pandemic relief measures and restrictions, which will drive telcos’ organic deleveraging capacity.
  • Sustainability of tariff hikes in India’s wireless services and lower capex could turn around free cash flow (FCF) for the first time in years.
  • Expensive airwaves in pending spectrum auctions in India, Malaysia, Indonesia and Thailand may squeeze telcos, leaving them with less flexibility to weather the 5G capex upcycle.
  • Singapore’s 5G investment may be indicative of the cost of a standalone network.
  • New entrants in the Philippines may influence price competition.

Janice Chong, director, Fitch Ratings, said: “Rating headroom is narrowing, despite a stable rating trajectory for most of our Asia-Pacific telecom portfolio, underlining the importance of staggered investments, dividend cuts and non-core asset sales in preserving balance-sheet strength.”