TRIS Rating affirms the company rating of dtac TriNet Co., Ltd. (DTN) and the ratings of DTN’s outstanding senior unsecured debentures at “AA+”, with "negative" outlook. At the same time, TRIS Rating assigns the rating of “AA+” to DTN’s proposed issue of up to Bt6,000 million in senior unsecured debentures. The proceeds from the new debentures will be used for debt repayment, investment, and working capital. The ratings reflect DTN’s strategic importance as a core subsidiary of Total Access Communication PLC (DTAC; rated “AA+/Negative”), one of three major cellular phone service providers in Thailand. The ratings also take into consideration the growth prospects for data services. The ratings are partly enhanced by the support from Telenor ASA (Telenor), DTAC’s major shareholder. However, these strengths are partially offset by highly competitive market, DTAC's softer operating performance, and the large capital expenditures needed to expand the network nationwide.
The ratings reflect DTN’s status as a core subsidiary of DTAC in consideration of the earnings it contributes to its parent company, large subscriber base, and its role in generating revenue on the license-based network. DTN, a wholly-owned subsidiary of DTAC, was established in 2006. In December 2012, DTN was awarded a 15-year license for the 2.1-gigahertz (GHz) spectrum. DTN provides wireless communications services using 3G (third generation) and 4G LTE (long term evolution) technologies. DTAC has the strong linkage with DTN. DTAC has a full control over DTN's operations through the appointment of its top management and the board of directors. DTAC and DTN share resources and network facilities to provide services to their subscribers.
In 2016, DTN’s total revenue was Bt66.1 billion, rising by 2% from 2015. DTN contributed about 80% of DTAC's total revenues. DTN's service revenues (excluding the interconnection charges or IC) were Bt58.7 billion, or about 91% of DTAC’s service revenues excluding the IC. DTN generated about 50% of DTAC's EBITDA (earnings before interest, taxes, depreciation, and amortization).
The ratings also recognize DTN’s market position and wide network coverage. As of June 2017, DTN had 22.7 million subscribers or about 96% of DTAC's total subscribers. DTN's subscribers account for about 25% of all 3G and 4G subscribers across the industry. DTN continues expanding its wireless communications network nationwide. As DTAC’s 2G concession will expire in 2018, all of DTAC's subscribers and operations will be migrated to DTN’s network. Given DTN’s strong relationship with DTAC, TRIS Rating believes that DTN would receive the support from DTAC, including financial assistance in the event of distress.
DTN’s credit ratings are strengthened by the support DTAC receives from Telenor, in the areas of managerial assistance, technological know-how, and support. DTAC is considered significant to Telenor in light of its earnings contribution. DTAC is the top earner of the Telenor Group outside Norway. In recognition of this, TRIS Rating expects that Telenor will support DTAC financially in a time of need.
The ratings also incorporate strong demand for cellular data services, which is largely caused by technological changes that impact consumer behavior and more affordable handsets. These factors mean all mobile service providers earn a higher proportion of their revenue from non-voice services.
Conversely, the ratings are partially offset by the fierce competition in the Thai wireless telecommunications service market. Given a saturated and price-sensitive market, all cellular phone service providers are using marketing activities, price packages, and handset subsidies in an effort to maintain their subscriber bases and defend their market shares. Further, the ratings are constrained by the large capital expenditures required to expand the network. Each cellular phone service provider needs to make huge capital expenditures to expand the coverage of their 4G networks.
With the strong linkage between DTN and DTAC, the company rating of DTN is equal to and moves correspondingly with that of DTAC. The company rating of DTAC is affirmed at “AA+” with "negative" outlook. As the concession of the 850-megahertz (MHz) and 1800-MHz spectrums coming to end in September 2018, DTAC is forced to participate in the forthcoming auction to ensure ample spectrum to provide service quality. DTAC’s financial profile is likely to weaken as it needs to acquire new spectrum while the license cost is expected to be high.
DTAC is expected to bid for new spectrums under the name of DTN. A high acquisition cost of a new spectrum is, therefore, built into TRIS Rating’s base case, which is expected to push the leverage ratio of DTN and DTAC’s consolidated debt to rise over the medium term. However, the actual investment cost for a new spectrum is uncertain, subject to several factors, including the number of spectrum to offer to the market, the degree of bidding competition, and the regulatory spectrum allocation plan. During 2017-2019, TRIS Rating expects DTN's revenue will be driven by the strong growth prospects for data services but remain under pressure from heightened competition. The operating margin is expected to continue improving, reflecting lower regulatory costs and lower costs for domestic roaming, arising from subscriber migration to DTN's network. DTN’s financial profile will gradually improve and come closer to DTAC's level over the medium term. TRIS Rating expects DTN to spend about Bt55 billion in capital expenditures, excluding the new license costs, during 2017-2019. The debt to capitalization ratio would considerably rise, following a high-priced spectrum. Cash flow protection would decline accordingly.
Rating Outlook
The “negative” outlook reflects the rating outlook of DTAC. Over the medium term, TRIS Rating expects the competition in the wireless telecommunications market will remain intense which will weigh negatively on DTAC's financial profile. DTAC’s financial profile is likely to weaken as a result of the lingering, competitive market and an expected rise in leverage as DTAC needs to acquire new spectrums and expand network coverage. Any change in DTAC’s credit rating will affect DTN's credit profile accordingly.
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