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SE Asia telecom margins to decline as data importance grows, Fitch says

The competition and declining use of traditional voice and text services will lead to lower margins for most Southeast Asian telecom firms next year, but data demand growth will generally outpace margin decline, so cash generated and credit metrics will be broadly stable or slightly improve, except in Thailand, where large investment will increase leverage, according to Fitch Ratings.

Thailand's private operators' exposure to legal and regulatory risks will decline as they migrate customers to the new licence system for third-generation cellular service, which will overcome many of the weaknesses of the former 2G concession system.

Technology upgrades to 3G should support growth in non-voice revenue and offset declining voice services. A significant increase in capital expenditure for the 3G network will lead to deterioration in credit metrics. However, the two largest mobile operators - Advanced Info Service and Total Access Communication (DTAC) - have sufficient headroom in their ratings.

In Indonesia, Fitch expects the top four telcos will continue to dominate the market and that their credit metrics will be stable. Small, struggling companies are likely to be forced into mergers to survive, as the gap with the top four widens. Barring acquisitions, the telecom tower companies' leverage will improve as free cash flow (FCF) rises because of growing EBITDA (earnings before interest, taxes, depreciation and amortisation) and low levels of maintenance capex.

In Malaysia, growth and largely constant capex and dividends will offset the margin erosion of 100-150 basis points expected for wireless telcos. Fixed-line and broadband operator Telekom Malaysia has low ratings headroom. However, its operating EBITDA margin will remain resilient as its growing high-speed broadband business and lower capex should ensure stable leverage.

In the Philippines, operating EBITDA margins will continue to deteriorate because of unlimited/bucket tariff offerings, larger handset subsidies and substitution of data for voice and text services.

Nevertheless, more data adoption should lead to revenue rising by the mid-single digits, and lower capex should ensure positive FCF and stable credit profiles for both main operators - Philippine Long Distance Telephone Company and Globe Telecom.

The rating agency expects profitability for all three Singaporean telcos to remain stable, driven by better data pricing, which will offset the cost pressures of handset subsidies and higher pay-TV content costs.

Capex will trend lower as 4G investments are largely complete. Singapore Telecommunications' leverage will remain stable as cash flow from operations will cover its capex and dividends.

"We forecast that annual FCF and available cash will be sufficient to fund its acquisition budget of 2 billion Singapore dollars [Bt41 billion] over three years," Fitch said.

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