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Fitch Affirms China Mobile at 'A+', Stable Outlook
May 25, 2017 / 7:48 AM / 7 months ago

Fitch Affirms China Mobile at 'A+', Stable Outlook

(The following statement was released by the rating agency) HONG KONG, May 25 (Fitch) Fitch Ratings has affirmed China Mobile Limited's (CML) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) at 'A+'. The Outlook is Stable. KEY RATING DRIVERS Dominant Mobile Market Position: The ratings reflect Fitch's expectations that CML would be able to maintain its dominant position in China's mobile market over the medium term due to its significant economies of scale, robust financial position and solid execution ability. In 2016, CML's mobile service revenue market share remained high at 67%. At end-April 2017, it controlled subscriber share of 64% and 68% for all mobile and 4G services, respectively. The company also utilises its strength in mobile services to develop its broadband business, controlling a subscriber share of 28% at end-April 2017, based on the Ministry of Industry and Information Technology's data. Government-Directed Tariff Cuts: Further tariff reductions directed by the government may affect CML's revenue and EBITDA growth in 2017. However, we believe that the overall impact should be manageable for CML, as we expect to see continued favourable price elasticity. We believe this round of government-directed tariff cuts is less severe than the previous round in 2015. Chinese operators each pledged to substantially reduce dedicated internet access tariffs for small- and medium-sized enterprises and international long-distance call tariffs, and from 1 October 2017, cease to charge domestic long-distance and roaming fees for their mobile subscribers. Solid Profitability: We expect CML's EBITDA margin to remain solid at around 35%-36%, despite some pressure in 2017 due to utility- and labour-cost inflation and increased competition on 4G from the other two Chinese operators. CML's EBITDA margin rebounded to 36% in 1Q17, from 34% in 4Q16, after higher year-end customer retention and faster phasing-out of domestic long-distance and roaming fees in 2H16. We expect rising data demand, lower handset subsidies and improvement in the tower company's efficiency to help mitigate margin pressure. Declining Capex: CML's pre-dividend FCF margin should expand to over 14% in 2017-2019 as capex decreases. Fitch expects the company to continue to accumulate excess cash despite an increase in dividend payout ratio to 46% from 43%. CML will cut capex in 2017 to CNY176 billion as 4G investment declines. We forecast further capex cuts in 2018 and perhaps 2019. CML may start to spend on 5G capex slightly earlier than the other Chinese operators. However, we believe the majority of China's 5G capex is some years away; investment may start from 2019 at the earliest, but initial 5G spending is likely to be limited. Constrained by Sovereign Ratings: CML's ratings are constrained by China's sovereign rating (A+/Stable) as CML is ultimately controlled by the state. CML's standalone rating is 'AA-'. CML is 73%-owned by China Mobile Communications Corporation, which is 100%-owned by the State-Owned Assets Supervision and Administration Commission. DERIVATION SUMMARY CML's standalone rating of 'AA-' remains the highest among all Fitch's telecoms credits, but its rating is constrained by China's sovereign ratings (A+/Stable). CML has significantly stronger market position and more substantial net cash position than its global peers. Its credit profile remains stronger than that of global and local telecoms peers, including China Telecom Corporation Limited (A+/Stable), Singapore Telecommunications Limited (A+/Stable), SK Telecom Co., Ltd. (A-/Stable), Telekom Malaysia Berhad (A-/Stable), Verizon Communications Inc. (A-/Stable) and AT&T Inc. (A-/Rating Watch Negative). KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - around mid-single digit revenue growth with rising data revenue offsetting the decline in voice revenue - operating EBITDAR margin at 43%-44% in two to three years - capex of CNY176 billion in 2017 and CNY160 billion-190 billion in 2018-2019 - dividend payout ratio at 46% RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - A positive sovereign rating action Future Developments That May, Individually or Collectively, Lead to a Downgrade of the Standalone Rating to 'A+' - Reversal of its net cash position - Pre-dividend FCF margin falling below 8% on a sustained basis - Operating EBITDAR margin falling below 40% on a sustained basis CML has high rating headroom and Fitch therefore does not envisage a downgrade of the standalone rating to 'A+' from 'AA-' over the medium term. As CML's ratings are constrained by the sovereign's rating, any downgrade of the sovereign will lead to a corresponding downgrade in CML's ratings. LIQUIDITY Abundant Liquidity: At end-December 2016, CML's unrestricted cash balance of CNY426 billion far exceeded its interest-bearing borrowing of CNY5 billion. CML has no maturities due before October 2017. Debt Structure: Its debt totalled CNY5 billion at end-2016 (end-2015: CNY5bn), which consisted of the unsecured long-term bonds guaranteed by China Mobile Communications Corporation due in 2017. Contact: Primary Analyst Kelvin Ho Director +852 2263 9940 Fitch (Hong Kong) Limited 19/F., Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Nitin Soni Director +65 6796 7235 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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