Consolidation in China’s telecoms industry is unlikely within the next one to two years, as the profitability of smaller operators has not deteriorated to a level that would foster industry restructuring, Fitch Ratings forecast.
Smaller operators, however, may look for more collaboration, including network sharing, to reduce capex and improve efficiency. The firm predicts that industry consolidation may happen at a later stage if these measures cannot strengthen smaller operators’ competitive positions and profitability.
Even if there is consolidation in the near term, Fitch doesn’t expect China Mobile’s and China Telecom’s credit profiles to be significantly impaired. The most likely restructuring would involve a non-cash merger between China Telecom and China Unicom or a non-cash acquisition of Unicom by Telecom. The resulting combined entity could see large cost synergies on mobile and broadband services.
Fitch expects Telecom and Unicom to continue to face higher competition from China Mobile. The licensing of TD-LTE technology to the market leader since end-2013 has helped it regain some of the market position it lost in the 3G era. At the end of Q3, 4G users accounted for 30 per cent of China Mobile’s subscriber base, compared with 23 per cent for Telecom. Unicom has been losing mobile subscribers in 2015.
In addition, China Mobile should start offering fixed-mobile bundling to compete with its two rival after acquiring fixed-line operator China Tietong Telecommunications from its parent. The operator will pay CNY32 billion cash and assume CNY2 billion net debt for the stake in Tietong. The acquisition is scheduled for completion by year-end.
Fitch said the CEO reshuffling at Telecom and Unicom in August points to the government’s longer-term goal to improve the efficiency and profitability of smaller operators. To achieve the goal, it expects Unicom to adopt a more aggressive strategy in its 4G rollout, fibre network expansion and marketing spending to improve its network and service quality. It also expects Unicom and Telecom to explore more extensive mobile and fibre network sharing opportunities in addition to tower sharing as mandated by government.
Network sharing could be an attractive alternative to industry consolidation, since it could reduce cost and represent a step-by-step approach to an ultimate merger at a later stage. However, network sharing could delay industry consolidation.
Fitch believes that industry consolidation can achieve higher cost savings, as the two smaller players could combine retail operations as well as wholesale and network operations. However, the government may believe that the benefits of having three competitors outweigh such cost savings.
The agency predicts that the operators may face another round of tariff-cutting pressure from the government next year after the Ministry of Industry and Information Technology (MIIT) called for data tariff cuts of 20-40 per cent by end-2015. From October, the MIIT also required operators to allow consumers to carry over unused data within packages to the next month.
Comments