China Mobile and China Telecom are expected to continue to invest heavily in their 4G networks for the next two to three years to fight for market share, but the aggressive spending will curb their profit margin during that period, Fitch Ratings said.

The two operators have committed to spending a combined CNY308 billion ($50.3 billion) on capex this year.

After the government issued countrywide FDD-LTE licences in February, China Telecom raised its capex budget for this year by 40 per cent to CNY108 billion. Fitch expects it to remain high for the next two to three years (CNY100-110 billion).

The operator, the country’s third largest mobile player, aims to roll out 320,000 4G base stations and 140,000 indoor radio distribution systems by the end of the year.

China Mobile, which boosted capex 16 per cent in 2014 to CNY214 billion, will also continue to spend heavily over the next two to three years to boost its network quality and data service competitiveness. Its capex this year will decline slightly to CNY200 billion and is forecast to fall to CNY160-180 billion over the next two years.

Fitch expects the rollout of FDD-LTE service and the tower sharing deal to enable China Telecom to gain mobile market share. But it is forecasting EBITDA margins to shrink slightly to about 30 per cent for the next two to three years (down from 31.9 per cent in 2013).

China Mobile’s EBITDA, meanwhile, is also expected to fall during that period to 36-37 per cent (down from 42.5 per cent in 2014).

The government’s tower sharing initiative will enable China Telecom and China Unicom to gain access to China Mobile’s network resources and improve their network quality and coverage as well as reduce expenditure over the long term. However, tower sharing will boost China Telecom’s net leverage, and the transfer of its tower assets to the national tower company will be a non-cash transaction.

Fitch noted that China Mobile, with a 63 per cent market share, should generate a significant amount of cash from handing over its tower assets to the national tower company.

The impact of the country’s value-added tax (VAT) reform, which was implemented last June, is likely to be short-lived, Fitch said. The rating agency expects both China Mobile and China Telecom to adjust their revenue mix, raising value-added services to reduce output VAT liabilities.

The slowdown in China Mobile’s revenue growth last year to just 1.8 per cent was attributed in large part to the introduction of the VAT. Without the VAT, Moody’s senior analyst Gloria Tsuen said the market leader’s growth would have been about 5 per cent.