Thai mobile operators are expected to continue their aggressive marketing activities, including heavy handset subsidies and unlimited data offerings, which will keep them from improving their profitability in the second half of the year, Fitch Ratings said.

AIS and dtac, the two largest operators that account for more than 80 per cent of the country’s mobile service revenue, highlight the challenge facing the industry, Fitch said. Weak economic conditions have put pressure on overall service revenue, which was flat in H1 compared with a year earlier.

Voice revenue in Q2 continued to decline for the eighth consecutive quarter, while growth in non-voice revenue, although strong, started to slow slightly in Q2 as smartphone penetration reached around 50 per cent of the subscriber base.

Fitch expects the challenging business environment to continue in H2, with operators likely to aggressively try to defend or increase market share.

AIS, the largest operator with a 46 per cent market share, plans to subsidise low-end and midrange 3G handsets more heavily to speed up the migration to its 3G network as its 2G concession will expire in September.

Number two dtac is likely to maintain its handset subsidy programmes and unlimited data tariff offerings through H2, as the company is determined to win back market share.

The margin on handset sales for these companies is likely to remain negative and marketing costs will rise gradually in H2, which will offset the regulatory cost savings stemming from the migration to the 3G licence regime, Fitch said.

AIS has revised down its EBITDA margin guidance for 2015 to reflect more aggressive handset subsidies in H2. It now expects EBITDA margin to be unchanged from 2014’s 44.7 per cent, compared with previous guidance for EBITDA margin to rise by 1-2 points. Dtac expects its EBITDA margin to fall to 31-33 per cent in 2015 from 34.3 per cent in 2014 (its previous guidance forecast flat EBITDA margin year-on-year) to reflect ongoing competition.

Fitch expects competition in data pricing to ease in 2016 after the operators are granted 4G licences and roll out 4G service. The introduction of 4G could be an opportunity for operators to adjust data tariffs to better monetise the data growth, such as by offering plans based on data used for the new service, rather than the unlimited data plan offered on the 3G service.

Operating margins for AIS and DTAC remain strong and their financial leverage low. The companies are generally well-positioned to cope with competition without having a major rating impact, Fitch said. Downside risks remain, though. Significant higher-than-expected competition that reduces margin and cash flow from operations for a prolonged period would impair these companies’ ability to sustain high levels of investment and dividend payouts without hurting their credit quality.