Rating Research Services Media Release: Ratings On Taiwan Mobile Co. Ltd. Affirmed On Sustainable Market Position; Outlook Stable Primary Credit Analyst: Anne Kuo, CFA; (886) 2 8722-5829; anne.kuo@taiwanratings.com.tw Secondary Contact: David Hsu; (886) 2 8722-5828; david.hsu@taiwanratings.com.tw Overview Our anchor assessment of 'twaa' for Taiwan Mobile reflects the company's "strong" business risk profile and "minimal" financial risk profile compared to Taiwan obligors or "satisfactory" and "minimal," respectively, when compared to obligors worldwide. No modifiers have an impact on the anchor, and there is no other rating support consideration. We are affirming our 'twaa' long-term and 'twa-1+' short-term corporate credit ratings on Taiwan Mobile and our 'twaa' issue rating on the company's unsecured corporate bonds. The stable outlook reflects our view that Taiwan Mobile will maintain its market position as one of the top three wireless telecom companies in Taiwan, while maintaining its profitability and ratio of debt to EBITDA below 1.5x over the next two years. Rating Action Taiwan Ratings Corp. today affirmed its 'twaa' long-term and 'twa-1+' short-term corporate credit ratings on Taiwan Mobile Co. Ltd., and the 'twaa' issue rating on the company's unsecured corporate bonds. The outlook on the long-term corporate credit rating is stable. Rationale The rating affirmation reflects our expectation of Taiwan Mobile's sustained market position as one of the leading wireless telecommunications companies in Taiwan by market share. The company's sufficient economies of scale and large customer base will also support its 'adequate' operating efficiency and 'average' absolute profitability level, in our view. We also expect Taiwan Mobile to keep its adjusted ratio of debt to EBITDA below 1.5x over the next two years, despite the substantially increased debt level caused by 4G license acquisition costs and slightly declining profitability. 2014 Taiwan Ratings Corp. - 1 -
We view Taiwan Mobile's business risk profile as "satisfactory" compared with its global peers, and "strong" compared with local obligors. This mainly reflects Taiwan Mobile's 'satisfactory' market position in Taiwan's telecom industry and 'adequate' operating efficiency supported by sufficient economies of scale, well-established customer base and high industry entry barriers. In addition, Taiwan Mobile's engagement in cable and retailing businesses further enhance the company's product diversity. We believe the better growth momentum from the retail unit and the higher margin from its cable business have somewhat offset the limited growth in the saturated telecom market. Taiwan Mobile's EBITDA margin has trended downward to 30.8% in 2013 from over 39% in 2010. This is mainly due to regulatory tariff reductions and the low margin contribution from "momo," a retail operator the company acquired in 2011. We expect the declining margin trend to moderate over the next one to two years given the declining impact from regulatory tariff reductions and the closure of loss-making traditional retail channels. However, we don't expect Taiwan Mobile's EBITDA margin to increase to the 2010-2011 level given the firm's current product mix, regulated tariff constraints, and increasing operating expense from the commercialization of 4G operations. In our view, the 4G license should enable Taiwan Mobile to compete in offering the next generation of telecom services so that the company can largely maintain its market position. Taiwan Mobile expects to offer 4G services in the second half of 2014. We expect the three largest telecom operators' to adopt tiered-pricing for 4G services; however, the magnitude of average revenue per user and margin improvement will depend on the service's adoption rate and the level of market competition, including from new emerging competitors. We believe cable TV and cable broadband services will continue to be a key growth strategy for Taiwan Mobile given Taiwan's saturated mobile telecom market. The company's competitive position and profitability could improve if it acquires an additional cable business which carries a higher EBITDA margin. However, the timing of such an acquisition action remains highly uncertain given legal restrictions and we believe it is unlikely to materialize in the next 12 months. We view Taiwan Mobile's financial risk profile as "minimal," underpinned by the company's stable and strong cash flow generation. The acquisition cost of Taiwan Mobile's 4G licenses are higher than our previous expectation, resulting in a significantly higher debt level and weaker credit metrics as of the end of 2013. In addition, in line with its domestic peers, we expect the company to maintain a dividend payout ratio above 90% over the next one to two years. However, in our view, Taiwan Mobile will maintain its ratio of debt to EBITDA below 1.5x over the next one to two years given the company's strong cash flow generation and moderate capital expenditures. Our base case assumes: Taiwan's real GDP to grow 3.7% in 2014, and 3.9% in 2015. We expect the outcome of the 4G license bidding to stoke competition in Taiwan's telecom industry. Nevertheless, we believe the country's three large incumbents (Chunghwa Telecom Co. Ltd., Far EasTone Telecommunications Co. Ltd., and Taiwan 2014 Taiwan Ratings Corp. - 2 -
Mobile) will mostly maintain their business profiles and market shares in the next one to two years. Operations: o Taiwan Mobile's mobile revenue will grow by mid-to-high single digit percentage for 2014 and 2015, mainly driven by over 20% data revenue growth. o Fixed-line revenue will decline by a low single digit percentage due to pricing competition and substitution from other products. o Cable business will maintain steady modest growth of a low single digit percentage given the saturated market. o Taiwan Mobile's retail business will generate stronger growth of 10%-15% in 2014 and 2015 driven by rising online shopping business, despite the sluggish growth in TV home shopping and the closure of traditional retail channels. Taiwan Mobile's capital expenditure will range between NT$12.5 billion-nt$14 billion in 2014 and 2015, a similar level with 2013 excluding 4G license acquisition costs. The company will distribute NT$15.1 billion cash dividend in 2014, translating into a 97% payout to shareholders. We assume a similar payout ratio in 2015 and 2016. Based on these assumptions, we arrive at the following credit measures: EBITDA margin of 26.5%-30.0% in 2014 and 2015. Adjusted ratio of debt to EBITDA of 1.4x-1.5x in 2014 and 2015. Adjusted ratio of funds from operations (FFO) to debt at 55%-65% in 2014 and 2015. Adjusted ratio of free operating cash flow (FOCF) to debt at 30%-40% in 2014 and 2015. Liquidity The short-term rating on Taiwan Mobile is 'twa-1+'. We believe that the company has "adequate" liquidity to meet its needs over the next 6 months. Our view of Taiwan Mobile's liquidity profile incorporates the following major assumptions: The ratio of liquidity sources (including cash, liquid financial assets, undrawn bank lines and funds from operations) to liquidity uses (capital expenditures, cash dividends and debt maturities) will be above 1.2x over the next six months. Liquidity sources will continue to exceed uses, even if Taiwan Mobile's EBITDA were to decline by 15%. We believe that the company could absorb, with limited refinancing, high-impact, lowprobability events. Taiwan Mobile has well-established and solid banking relationships in Taiwan. The company has generally prudent financial risk management. Taiwan Mobile has a generally high standing in credit markets. Principal liquidity sources include: Cash and short-term investment: NT$8.9 billion as of the end of 2013. FFO: NT$27 billion-nt$28.5 billion in 2014. Undrawn long-term bank lines: about NT$10 billion. 2014 Taiwan Ratings Corp. - 3 -
Principal liquidity uses include: Short-term plus long-term debt repayment of about NT$15 billion-nt$20 billion in next six months. Capital expenditure: NT$6 billion-nt$7 billion as maintenance expenditure in 2014. Cash dividends: NT$15.1 billion in 2014. Outlook The stable outlook reflects our expectation that Taiwan Mobile will be able to sustain its market position as one of the top three players in Taiwan's telecommunication industry and maintain its adjusted ratio of debt to EBITDA at 1.4x-1.5x over the next two years, despite the higher-thanexpected 4G license acquisition cost and slightly declining profitability. Downside scenario We may lower the rating if the company's ratio of debt to EBITDA rises above 1.5x for an extended period. This may result from further material tariff reductions, rising competition, or if the company takes on more aggressive investments, acquisitions or shareholder value creation initiatives. We may also lower the rating if the company's competitive position weakens such that it leads us to change of our assessment of its business risk profile, including weakening market position or deteriorating operating efficiency. Upside scenario Although unlikely in the next 12 months, we may raise the long-term rating if the company can enhance its competitive position--which could occur via a material expansion of its fixed-line or cable business--while maintaining a "minimal" financial risk profile. Ratings Score Snapshot Corporate Credit Rating: twaa/stable/twa-1+ Note: The ratings scores are based on Standard & Poor's global scale comparison. Business risk: Satisfactory Country risk: Intermediate Industry risk: Intermediate Competitive position: Satisfactory Financial risk: Minimal Cash flow/leverage: Minimal Anchor: twaa Modifiers Diversification/Portfolio effect: Neutral (no impact) 2014 Taiwan Ratings Corp. - 4 -
Capital structure: Neutral (no impact) Liquidity: Adequate (no impact) Financial policy: Neutral (no impact) Management and governance: Satisfactory (no impact) Comparable rating analysis: Neutral (no impact) Related Criteria And Research Related Criteria Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Jan. 2, 2014 Key Credit Factors For The Telecommunications And Cable Industry, Dec. 12, 2013 Corporate Methodology, Nov. 19, 2013 Methodology: Industry Risk, Nov. 19, 2013 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 Understanding TRC Rating Definitions,, Oct. 29, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 TRC Corporate Sector Issue Rating Criteria,, Aug. 6, 2010 Ratings List Rating Affirmed Taiwan Mobile Co. Ltd. Corporate Credit Rating Senior Unsecured Issue Rating twaa/stable/twa-1+ twaa 2014 Taiwan Ratings Corp. - 5 -
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