TRIS Rating has assigned the rating of “AA+” to the proposed issue of up to Bt5,000 million in senior unsecured debentures of dtac TriNet Co., Ltd. (DTN) due within 2026. At the same time, TRIS Rating has affirmed the company and outstanding senior unsecured debenture ratings of DTN at “AA+”. The outlook remains “stable”. The new issue rating replaces the issue rating previously assigned on 16 June 2016, following DTN’s request to extend tenors up to 10 years, from seven years previously. The proceeds from the new debentures will be used for debt repayment and investment, and as working capital. The ratings reflect DTN’s strategic importance as a core subsidiary of Total Access Communication PLC (DTAC; “AA+/Stable”), the second-largest wireless telecom company in Thailand. The ratings also take into consideration its strong market position, wide network coverage, and growth prospect of data demand. The ratings are partly enhanced by the support from Telenor ASA (Telenor), DTAC’s major shareholder. However, these strengths are partially offset by aggressive competition and the large investment required in a network rollout nationwide.
The “stable” outlook is based on the expectation that DTN will remain a core subsidiary of DTAC and that the migration of subscribers to its network will continue, bringing a saving in regulatory cost. Any change in DTAC’s credit rating will affect DTN accordingly.
DTN, a wholly-owned subsidiary of DTAC, was established in 2006. Initially, DTN provided international direct dialing (IDD) services. In December 2012, DTN was awarded a 15-year license for the 2.1 gigahertz (GHz) spectrum. After it won the license, DTN provides wireless communications services using 3G (third generation) and then 4G LTE (long term evolution) technologies. The 3G and 4G services were launched in July 2013 and May 2014, respectively.
The ratings reflect DTN’s status as a core subsidiary of DTAC in consideration of its earnings contribution, subscriber base, and its role in generating revenue on license-based network. In 2015, DTN’s total revenue was Bt64.7 billion, rising by 14% from 2014. DTN contributed about 74% of DTAC's total revenues and about 90% of DTAC’s service revenue (excluding interconnection charge or IC). DTN generated about 41% of DTAC's EBITDA (earnings before interest, taxes, depreciation, and amortization). DTAC has full control over DTN's operations through the appointment of its top management and board of directors. DTAC and DTN share resources and network facilities in order to provide services to their subscribers. At the end of March 2016, DTN had a total of 23.1 million subscribers or about 90% of DTAC's total subscribers. DTN is considered DTAC’s key subsidiary responsible for operating and developing the wireless communication network. DTAC’s 2G concession will expire in 2018 and all of DTAC's subscribers and operations will be migrated to DTN’s network. Given its solid relationship with DTAC, TRIS Rating believes that DTN would receive supports from DTAC, including financial assistance in the event of distress.
The ratings also recognize DTN’s strong market position and wide network coverage. DTN's subscribers account for about 28% of all 3G and 4G subscribers across the industry. DTAC has looked for growth by diversifying revenue away from the saturating voice service. In common with its competitors, DTAC has shifted towards a greater emphasis on data services. DTAC is aimed at expanding 4G coverage to all districts nationwide by the third quarter of 2016, part of which is based on 2.1 GHz spectrum held by DTN. The ratings also incorporate heightened demand for mobile data, which is largely caused by technology changes that impact consumer behavior, and more affordable handsets. This results in a higher proportion of non-voice service revenue earned by operators.
DTN’s credit ratings are strengthened by the support DTAC receives from Telenor, in the areas of managerial assistance and technological know-how support. Telenor, a leading Norwegian telecommunications company, is the major shareholder of DTAC. Telenor’s Thailand-based operation is considered significant to the group in light of its earnings contribution. DTAC is recognized as top earner in Telenor Group outside Norway. In recognition of this, TRIS Rating expects that Telenor will also support DTAC financially in time of needs.
Conversely, the ratings are partially offset by the intense competition in wireless telecommunication services. Given saturated and price-sensitive market, all mobile service providers will use more aggressive pricing strategies and marketing activities in an effort to maintain their subscriber bases and defend their market shares. Further, the ratings are constrained by the large capital expenditures required for network investment. The mobile service providers also need to invest in 4G technology nationwide with huge capital expenditures due to heightened demand for mobile data services.
DTN's service revenues grew from Bt56.3 billion in 2014 to Bt63.7 billion in 2015. DTN's operating margin (operating income before depreciation and amortization as a percentage of sales) rose from 14% in 2014 to 17.5% in 2015. The margin improved but remains under pressure from the cost to operate two networks, large depreciation and amortization charges, and high marketing expenses. Funds from operations (FFO) rose from Bt7.2 billion in 2014 to Bt10.6 billion in 2015. DTN reported total debt of Bt48.5 billion at the end of 2015 because of new debentures issued in 2015 to support the 4G network rollout. The outstanding debt included Bt15.5 billion of on-call shareholder loan.
During 2016-2018, TRIS Rating expects DTN's revenue will continue to grow at a moderate rate, reflecting its efforts to migrate the subscribers on DTAC's concession-based network to DTN's license-based network. In addition, the growth prospects for data services are strong. DTN’s operating margin is expected to continue improving, reflecting the regulatory cost saving arising from the larger subscriber base. FFO will increase and come closer to DTAC's levels. TRIS Rating expects DTN to spend about Bt56 billion in capital expenditures over 2016-2018. The investment could be more if DTN wins the spectrum auctions in the future. DTN’s financial profile will remain weaker than DTAC’s in the medium term. TRIS Rating expects DTAC will continue its full support to DTN and DTN's ability to raise fund will heavily rely on DTAC's credit quality. However, with DTAC’s support and the transition of the subscribers and network from DTAC to DTN, the company is expected to strengthen over time.
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