TRIS Rating has affirmed the company rating and the ratings of the senior unsecured debentures of True Move H Universal Communication Co., Ltd. (TUC) at “BBB+” with “stable” outlook. The ratings reflect TUC's competitive position as the third-largest mobile phone service provider in Thailand. The ratings take into consideration TUC's status as a core business unit under the TRUE Corporation PLC (TRUE; rated "BBB+/Stable"). The ratings reflect the ongoing operational and financial support from TRUE. However, these strengths are partially offset by the stiff competition in the mobile industry and TUC's weakened financial profile from the recently acquired two high-priced mobile spectrums. In addition, a nationwide network rollout will require a substantial investment.
The “stable” outlook is based on the expectation that TUC will maintain its leading market position in the data service segment and deliver improved operating performance despite aggressive competition. TUC's status as a core business within the TRUE Group is expected to remain unchanged. Any change to TRUE's credit rating will impact TUC's rating accordingly. TUC's rating upside is limited during the next 12 months, taking into account TUC's current financial profile. However, an upgrade could emerge if TUC considerably gains higher market share and strengthens profitability without hurting the balance sheet. TUC's ratings could be downgraded if the company is unable to monetize its new investment such that operating performance notably weaker than TRIS Rating's expectation. If the ratio of debt to capitalization stays over 65% on a sustained basis, the ratings could also be under downward pressure.
Several past legal uncertainties, such as access charges or excise tax issues, will persist and will not be resolved any time soon. However, the probability of seeing material adverse legal consequences in the near term is believed to be subsided to some extent. The ratings could be under downward pressure if the legal outcomes significantly affect TUC's financial profile.
Incorporated in 2010, TUC is wholly owned by TRUE, an integrated telecom company in Thailand, which offers fixed-line broadband Internet, mobile phone, and pay-TV services. The ratings reflect TUC’s competitive position as the third-ranked mobile phone service provider in Thailand. TUC is the first mover for 3G (third generation) and 4G LTE (long term evolution) services, launched in 2011 and 2013, respectively. TUC provides wireless telecommunication services in the 850-megahertz (MHz) spectrum under a wholesale-resale agreement with CAT Telecom PLC (CAT) and in three spectrums under licenses from the National Broadcasting and Telecommunications Commission (NBTC), including the 2.1 gigahertz (GHz) spectrum. In the wake of fast-growing demand for mobile data, TUC acquired the 1800-MHz spectrum under an 18-year license, and the 900-MHz spectrum under a 15-year license. With the widest viable spectrums in its possession, TUC can use its broad range of spectrums to serve the soaring demand for data services. At the end of March 2016, TUC had a total of 20.4 million subscribers or about 24% market share in terms of the number of subscribers. Looking ahead, TUC’s business profile hinges on its ability to acquire new subscribers and increase operating cash flow.
TUC's credit quality is closely tied with TRUE's credit profile, considering its strategic importance and its significant contribution to the TRUE Group. In 2015, TUC contributed about 69% of TRUE's total revenues and 45% of TRUE's EBITDA (earnings before interest, taxes, depreciation, and amortization). TRUE is fully involved in TUC's operations, including nominating board of directors and designating the top management. TRUE provided financial support to TUC in the forms of capital injections, worth about Bt85 billion during 2011-2014. TRUE's recent capital increase of Bt60 billion in June 2016 will be injected into TUC to support the recent 1800-MHz and 900-MHz spectrum acquisitions. TUC’s business strength is also supported by the utilization of the TRUE Group's brand, which TUC offers mobile services under the "true move H" brand. Moreover, TRUE's stores and outlets bundle all services of the TRUE Group, including TrueOnline (fixed-line broadband Internet) and TrueVisions (pay-TV). The support from TRUE enhances TUC's competitive position and is considered a positive factor for TUC's ratings.
During the past five years, TUC's service revenue (excluding interconnection charges or IC) outpaced the growth rate of the Thai wireless telecommunications industry, driven mainly by robust double-digit growth in demand for data services. TUC's service revenue has grown on an average of 14% per annum over the past five years, compared with industry growth averaging 7% per annum. At the end of March 2016, TUC had 22% market share based on industry-wide service revenue. TUC will roll out its 4G technology nationwide, the centerpiece of the company’s strategy to attract subscribers. TUC targets a 33% service revenue market share by the end of 2018.
TUC’s rapid growth is at risk of intense competition in wireless telecommunication services. Given nearly saturated and price-sensitive market, all mobile service providers will use more aggressive pricing strategies and marketing activities in an effort to attract new subscribers and safeguard their market shares. The level of competition will depress profits and will be a rating constraint in the years ahead.
The new spectrums acquired support TUC’s growth plans and ensure an ample amount of spectrums over a multi-year period. However, the hefty cost of the spectrums weighs on TUC's financial position, leaving TUC with a heavy debt load in the medium term. TUC has pledged to pay a total of Bt116 billion for both spectrum licenses, lifting its debt (including operating lease obligations and accrued license fee) from Bt30.6 billion in 2014 to Bt174.1 billion at the end of March 2016. Adding to that, TUC budgets expenditures for network expansions for a total of Bt51.6 billion until 2021. In response, TRUE has raised Bt60 billion in new equity capital to inject into TUC. TUC plans to use Bt40 billion to repay debts. The remainder will be reserved for the network rollout.
Under TRIS Rating’s base-case scenario, TUC's top line will will be in the range of Bt94-Bt106.7 billion during 2016-2018, aided by 10%-20% annual growth in service revenues. TUC’s profitability is weaker than peers’ and will remain under pressure by the intense competition. The operating margin (operating income before depreciation and amortization as a percentage of sales) is expected to be between 12%-18% per annum. Funds from operations (FFO) will range between Bt8-Bt17 billion during 2016-2018. The ratio of FFO to total debt is expected to range between 7%-17% during 2016-2018.
TUC's liquidity profile will be tight during the next 12 months. Sources of funds are expected FFO of at least Bt8 billion, new capital of Bt60 billion, and cash and cash equivalents of Bt8 billion as of March 2016. Uses of funds are debt coming due of Bt55 billion and planned capital expenditures of Bt23 billion. TUC will need new borrowings to increase its financial flexibility. Leverage is expected to improve after the capital injection from TRUE. The ratio of debt to capitalization is projected to improve from 79.1% at the end of March 2016 to around 53%-56% during 2016-2018.
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