Announcement No. 401
7 July 2006
Contacts E-mail Addresses
Yingyong Chiaravutthi yingyong@tris.co.th
Kanyarat Juavijitjan kanyarat@tris.co.th
Nalin Tungtumniyom nalin@tris.co.th
WatanaTiranuchit watana@tris.co.th
Total Access Communication Public Company Limited
Company Rating: A
Issue Ratings:
TAC089A: Bt3,000 million senior debentures due 2008 A
TAC089B: Bt2,500 million senior debentures due 2008 A
TAC09OA: Bt4,000 million senior debentures due 2009 A
TAC09OB: Bt1,000 million senior debentures due 2009 A
TAC109A: Bt3,500 million senior debentures due 2010 A
Rating Outlook: Stable
Rating History: Company Rating Issue Rating(Unsecured)
22 Sep 2000 A- A-
Rating Rationale
TRIS Rating upgrades the ratings of Total Access Communication PLC (TAC) and its debentures
to “A” from “A-”. The ratings reflect the company’s competitive strength as the second largest cellular operator in Thailand and its ability to capture a still growing, though at a slower pace, demand for mobile services. The ratings also take into consideration benefits in terms of an experienced management team appointed by Telenor ASA (Telenor), a Norwegian telecommunication company, and its continually improving financial leverage. These strengths are partially offset by a heightened level of competition, which will pressure TAC’s profitability, the large capital expenditures required to expand service coverage and capacity, as well as the uncertainties in several areas of telecommunications regulations.
As of 31 March 2006, the penetration rate of cellular phones in Thailand was 51%, up from 48% at the end of 2005. The industry had enjoyed stellar subscriber growth rates during 2001 and 2002 at 120% and 121% respectively, but the rate declined dramatically to only 14% in 2005. The competitive environment in the industry has intensified since 2002 when True Move PLC entered the market. The Thai mobile industry is still dominated by Advanced Info Service PLC (ADVANC) with a subscriber market share at 51%, followed by TAC at 30%, and True Move at 15%. Offers of low-tariff packages have been the most commonly used marketing tool by most operators to attract and retain subscribers. As a result, the industry has repeatedly experienced price wars that have encouraged subscribers to make unnecessarily long calls. Subsequently, the price wars have created network connection problems, leading to higher capital requirements for network expansion.
TAC has been able to maintain its market share at around 30% since 2002. This success is largely driven by innovative price promotions, a segmented approach to meet consumer and corporate customer needs, and a customer-oriented strategy. As of the first quarter of 2006, TAC had a total of 9.8 million subscribers, a 13% increase from the end of 2005; the number of subscribers surpassed 10 million in April 2006. Prepaid customers are the major growth engine for service revenues. The company owns a network that covers more than 90% of the population, and plans to expand further especially in upcountry regions, where there are still more rooms for growth. TAC has planned to increase its non-voice revenues by improving network capacity in preparation for Enhance Data-rates for GSM Evolution (EDGE) and 3G technology.
TAC is also expected to benefit from the recent additional investment by Telenor in terms of managerial assistance through key management and director positions appointed by Telenor. Telenor’s direct ownership of TAC increased from 29.9% in 2000 to 32.9% after the tender offer in December 2005. At the end of the first quarter of 2006, Telenor’s economic exposure (direct and indirect) in TAC was 70.2%.
TAC has been successful in lowering its financial leverage. The debt to capitalization ratio has improved from 60% in 2003 to 49% at the end of March 2006. Although the company’s US$300 million Yankee bond issue will come due in November 2006, TRIS Rating expects that the company will be able to refinance it. The funds from operations (FFO) to debt ratio has almost doubled from its 2001 level, driven mainly by healthier operating performance. However, huge capital expenditures for network expansion and 3G technology are expected in the near future and this will likely keep TAC from further de-leveraging its balance sheet.
Rating Outlook
The “stable” outlook is based on the expectation that TAC, under the helm of its current skilled management team, will sustain its competitive position and will be able to generate sufficient FFO to expand the network without raising its financial leverage. The outlook is also based on the expectation that the new telecommunications regulations introduced by the National Telecommunications Committee (NTC) will not have an adverse impact on TAC’s operating performance.
Key Rating Considerations
Strengths/Opportunities
? Second largest cellular-phone operator in Thailand
? Growing demand for mobile phone services
? Improving financial profile
? Draw on experience of Telenor Group
Weaknesses/Threats
? High price competition
? Uncertain telecom regulations
? Large capital expenditures during the next three years
Corporate Overview
TAC was founded in August 1989 to provide wireless telecommunication services in the 800 MHz and 1800 MHz frequency bands in Thailand under a 27-year BTO (Build-Transfer-Operate) concession granted by CAT Telecom PLC (CAT). The concession will expire in 2018. In 1994, TAC entered into an Access Charge Agreement with TOT PLC (TOT). Under both agreements, TAC is required to pay TOT Bt200 per subscriber per month from postpaid subscribers and 18% of revenues of prepaid subscribers, and pay CAT 20% of mobile service revenues, net of the TOT’s access charge. The percentage of revenue sharing to CAT will rise to 25% from September 2006 to 2011, and will rise again to 30% until the end of the concession.
As of March 2006, TAC’s cellular-phone service revenue was accounted for 97% of its total revenues. Domestic voice service revenues contributed around 80% of cellular-phone service revenue, where 64% of domestic voice service revenue was from prepaid subscribers and 36% was from postpaid subscribers. International roaming and value-added services, such as SMS, MMS, and GPRS, contributed about 12% of service revenue. The total subscribers base was 9.8 million, divided into 8.2 million prepaid and 1.6 million postpaid. TAC offers mobile packages based largely on customer segmentation. Prepaid packages include “Happy” “Hey Ha” “Kra-Puk” and “Baby,” while postpaid packages include “ZAD” “Work” and “Maximize.”
Recent Developments
? Telenor now TAC’s largest shareholder
In 2000, Telenor forged an important strategic alliance with TAC through a direct investment in United Communication Industry PLC (UCOM). In October 2005, Telenor Asia Pte Ltd., a wholly-owned subsidiary of Telenor, and Thai Telco Holdings Ltd. (TTH), a Thai investment holding company, proposed to buy the remaining TAC shares in a mandatory tender offer, triggered by TTH’s acquisition of UCOM shares. The offer was finalized in December 2005. Prior to the tender offer, Telenor had a 29.9% direct ownership in TAC. Following the tender offer, their direct ownership is 32.9%. As at the end of the first quarter 2006, Telenor’s economic exposure (direct and indirect) in TAC was 70.2%. TAC has two major shareholders: UCOM with 41.64% and Telenor Asia with 32.9%.
Telenor is a leading telecommunication service provider in Norway and has substantial mobile operations in the Nordic regions, Central and Eastern Europe, and Asia. The company’s strategy for international markets is to integrate local expertise with the group’s know-how to derive benefits from cross-borders synergies.
INDUSTRY ANALYSIS
? Growth of new subscribers slows
After impressive growth of around 120% per annum during 2001 and 2002, the growth
rate of new mobile subscribers slowed down substantially to only 14% in 2005 as the penetration rate of mobile phones approached saturation. However, compared with penetration rates in other countries, Thailand still has room to grow during the next two to three years.
Table 1: Number of Mobile Phone Subscribers and Penetration Rate
2002 2003 2004 2005 1Q/2006
Market size (million) 17.5 22.2 27.0 30.2 32.4
Growth rate (%) 119 27 22 12 7
Penetration (%) 28 35 44 48 51
Sources: Websites of ADVANC, TAC, TRUE, and Bank of Thailand
? Prepaid customers account for more than 80% of total mobile subscribers
The tremendous growth in Thailand during 2001 and 2002 was attributed to the popularity of prepaid services launched in mid-1999 and the continuous drop in handset prices. As of March 2006, prepaid subscribers clearly dominated the market and accounted for approximately 87% of mobile-phone subscribers in Thailand.
Table 2: Prepaid and Postpaid Subscribers of 3 Largest Mobile Phone Operators (’000)
2002 2003 2004 2005 1Q/2006
Prepaid
ADVANC 8,136 11,124 13,064 14,409 14,716
TAC 4,204 5,383 6,510 7,212 8,185
True Move 877 1,540 2,928 4,009 4,449
Total 13,218 18,046 22,501 25,630 27,350
Postpaid
ADVANC+DPC 2,526 2,115 2,120 2,000 1,918
TAC 1,250 1,168 1,277 1,465 1,638
True Move 459 285 453 449 451
Total 4,236 3,568 3,849 3,914 4,007
Prepaid (%) 76 83 85 87 87
Postpaid (%) 24 17 15 13 13
Sources: Websites of ADVANC, TAC, and TRUE
? Narrower network coverage gaps among operators
ADVANC’s mobile phone network has been far more extensive than that of TAC and True Move, which enables ADVANC to maintain a competitive edge over its peers. However, the gap has narrowed because both TAC and True Move have spent budget heavily to improve their networks.
? Framework for interconnection charge formally announced
The progress of liberalization of the telecom industry has been slow, but it has gradually moved in the right direction. On 17 May 2006, the much-anticipated interconnection charge announcement was published in the Royal Gazette, giving it the effect of law. On 1 June 2006, three major mobile operators submitted their “reference interconnect offer” (RIO) of Bt1 per minute to the NTC. TOT and CAT have not submitted their RIO and asked the NTC for a 30-day extension. It takes the NTC 90 days to approve the rates and another 90 days for all operators to engage in bilateral agreements. It
is expected that interconnection rate will be settled by early 2007 at the earliest. However, details regarding access charges and concession conversions remain unclear at the moment.
Limitations on foreign ownership of Thai telecom operators remain an open issue. Proposed changes are in the process of public hearings on the third draft of the regulations. The draft limits foreign ownership to 49%. In addition, Thai telecom firm that is owned by foreign company, whose major shareholder is the foreign government, will be put on the “priority watch list” and must release a public report monthly. TAC faces the risk of being on the priority watch list and its operations will be closely scrutinized by the regulator (information as of March 2006). Other key regulations that are still in progress
are 3G licenses, antitrust regulations, number portability, and standard contracts between operators and customers.
TRIS Rating believes TAC’s business and financial operations will not be adversely impacted by the new regulatory regime.
However, should adverse regulatory changes happen, TAC is expected to try its best to
defend its competitive position and push for a level playing field. TRIS Rating will monitor the situation closely and will revise TAC’s
ratings should any significant developments arise.
BUSINESS ANALYSIS
? TAC maintains second position
Despite the fact that the competitive environment has been intense, TAC has proved
to be a formidable player in the Thai telecom market by maintaining its market
share at around 30% since 2002.
Table 3: Market Share of Mobile Phone Operators in Thailand
2002 2003 2004 2005 1Q/2006
ADVANC+DPC 61 60 56 54 51
TAC 31 30 29 29 30
True Move 8 8 13 15 15
Others 0 3 2 2 3
Sources: Websites of ADVANC, TAC and TRUE
TAC bases its business strategy around the concept of “value-for-money.” Since the launch of its new brand “DTAC” in 2001, the company has constantly focused on customer service, innovative packages, and a segmented approach to meet consumer and corporate customer needs in order to attract new subscribers and retain existing customers. The organization structure has changed from product-oriented to be more customer-oriented, emphasizing the objective to create value for subscribers.
? Postpaid ARPU declines, while prepaid ARPU rises
As of March 2006, TAC’s average revenue per user (ARPU) for postpaid subscribers declined 10% year on year to Bt911, due to price cutting. On the other hand, ARPU for prepaid subscribers has shown more price elasticity amid cheap price promotions by rising 8% in the same period to Bt310, due to a positive impact from higher minutes of use (MOU). Despite the fact that prepaid subscribers make up around 83.3% of total subscribers and show a more promising growth rate, TAC faces a challenge to create more brand loyalty as prepaid subscribers tend to change their mobile service providers more often.
Given the strategic importance of the prepaid market, TAC plans to launch innovative offerings to attract new customers and counter price competition with short-term promotions to retain existing subscribers. The focus of the postpaid market is on revitalizing the market by tapping working people and high-end segments. Though TAC intends to steer away from offering tariff-cutting promotions, the low-price campaigns
are expected to continue, at least until the implementation of the interconnection charge (IC). The expectation is that operators who can build on extensive customer base will benefit by being the net receiver of the IC. TAC has also launched promotions, such as ZAD 5 and Kra-Puk, to encourage users to call within its own network in order to avoid paying the IC when the regulation is in place.
? Growth from upcountry and value-added services
TAC will use a more aggressive business strategy to increase market share upcountry where there are more growth opportunities than in Bangkok. Another key revenue driver is value-added services (VAS). As of March 2006, VAS contributed 7% of service revenues, up from 5% the same quarter last year, largely due to an increase in usage of SMS, MMS, WAP, and GPRS.
? Telenor involvement to remain at current level
Over the years, TAC has constantly received the benefit of managerial assistance
from Telenor. As of March 2006, five out of nine board members and some key management positions in TAC are appointed by Telenor. However, Telenor is not expected to become more involved in TAC’s operation or exert control over any decision making more than
the current level. In addition, TAC is not expected to receive any financial assistance
in terms of guarantees from Telenor.
FINANCIAL ANALYSIS
TAC’s financial policy has been moving in a more conservative direction, characterized
by improving leverage and full hedging of all foreign-currency debt. However, high capital commitments for network expansion will cause the leverage ratio to stay at the current level in
the intermediate term. The company’s target is to have the debt to equity ratio less than 1.
? Cash flow protection measures improving
TAC’s cash flow protection measures have been improving over the past few years. FFO to net debt ratio was at 29% in 2005, doubling from 14% in 2001. However, the ratio
is not expected to improve further due to the huge capital expenditures needed to finance network improvements. Capital expenditures
are projected to be around Bt12,000 million in 2006. The number is expected to be higher if price wars do not subside.
TAC plans to refinance its US$300 million Yankee bond, which will mature in November 2006, by issuing Bt6,000 million in debentures
and drawing down the available Finnish Export Credit loans and bank syndicated
loans. The refinancing risk is believed to be manageable through TAC’s long relationship
with many financial institutions and its ability to raise funds in the bond market. As of March 2006, the company had Bt861 million in cash
on hand, while available short-term credit facilities were around Bt5,000 million.
? Operating margins, excluding regulatory costs, stable at 70%
For the first quarter of 2006, the ratio of operating income before depreciation and amortization to sales (operating margin) was 36%, down from 38% in the same period last year, largely driven by higher regulatory costs from prepaid subscribers and higher marketing expenditures. Excluding regulatory costs, operating margin was relatively stable at
70%. TAC’s competitive position will be weaker than ADVANC after the fourth quarter
of 2006 when the revenue share paid to CAT will rise from 20% to 25%. This will provide ADVANC with more competitive edge since
its regulatory costs are around 13% lower than TAC.
Table 4: Debt Profile as of 31 March 2006
Issuer Type Size (Mil) Balance (Bt mil) Maturity Date
Trust Receipts - - 564 2006
P/N - Bt900 900 Apr 2006
TAC064A Amortized Bt15,000 1,071 4 Apr 2006
Convertible Bonds Bullet US$220 38 31 May 2006
Yankee-06 Bullet US$300 13,306 4 Nov 2006
Syndicated Bullet Bt4,000 4,000 18 Nov 2007
TAC089A Bullet Bt3,000 3,000 25 Sep 2008
TAC089B Bullet Bt2,500 2,500 25 Sep 2008
TAC09OA Bullet Bt4,000 4,000 30 Oct 2009
TAC09OB Bullet Bt1,000 1,000 30 Oct 2009
NIB #1 Amortized US$30 1,271 30 Jun 2010
TAC109A Bullet Bt3,500 3,500 25 Sep 2010
NIB #2 Amortized US$40 1,644 31 May 2015
Total - - 36,794 -
Source: TAC
? Financially conservative target
At the end of March 2006, the company had Bt36,800 million in interest-bearing debt, compared with Bt39,900 million in the previous quarter. The debt to capitalization ratio was
49%, down from 54% at the end of 2004, and from 60% in 2003. Over the years, TAC has successfully reduced its leverage and has moved the debt to equity ratio closer to a target of 1. Given the pressure on operating margin due to the price wars and the substantial capital investments needed, TAC’s financial leverage is expected to remain at the current level in the intermediate term, and gradually improve in the long term.
Financial Statistics and Key Financial Ratios*
Unit: Bt million
-------------------Year ended 31 December-------------------
3/2006 ** 2005 2004 2003 2002 2001
Sales and service revenues 12,179 43,198 38,943 31,781 32,001 30,100
Gross interest expense 862 3,573 2,496 2,806 2,871 3,122
(ยังมีต่อ)
7 July 2006
Contacts E-mail Addresses
Yingyong Chiaravutthi yingyong@tris.co.th
Kanyarat Juavijitjan kanyarat@tris.co.th
Nalin Tungtumniyom nalin@tris.co.th
WatanaTiranuchit watana@tris.co.th
Total Access Communication Public Company Limited
Company Rating: A
Issue Ratings:
TAC089A: Bt3,000 million senior debentures due 2008 A
TAC089B: Bt2,500 million senior debentures due 2008 A
TAC09OA: Bt4,000 million senior debentures due 2009 A
TAC09OB: Bt1,000 million senior debentures due 2009 A
TAC109A: Bt3,500 million senior debentures due 2010 A
Rating Outlook: Stable
Rating History: Company Rating Issue Rating(Unsecured)
22 Sep 2000 A- A-
Rating Rationale
TRIS Rating upgrades the ratings of Total Access Communication PLC (TAC) and its debentures
to “A” from “A-”. The ratings reflect the company’s competitive strength as the second largest cellular operator in Thailand and its ability to capture a still growing, though at a slower pace, demand for mobile services. The ratings also take into consideration benefits in terms of an experienced management team appointed by Telenor ASA (Telenor), a Norwegian telecommunication company, and its continually improving financial leverage. These strengths are partially offset by a heightened level of competition, which will pressure TAC’s profitability, the large capital expenditures required to expand service coverage and capacity, as well as the uncertainties in several areas of telecommunications regulations.
As of 31 March 2006, the penetration rate of cellular phones in Thailand was 51%, up from 48% at the end of 2005. The industry had enjoyed stellar subscriber growth rates during 2001 and 2002 at 120% and 121% respectively, but the rate declined dramatically to only 14% in 2005. The competitive environment in the industry has intensified since 2002 when True Move PLC entered the market. The Thai mobile industry is still dominated by Advanced Info Service PLC (ADVANC) with a subscriber market share at 51%, followed by TAC at 30%, and True Move at 15%. Offers of low-tariff packages have been the most commonly used marketing tool by most operators to attract and retain subscribers. As a result, the industry has repeatedly experienced price wars that have encouraged subscribers to make unnecessarily long calls. Subsequently, the price wars have created network connection problems, leading to higher capital requirements for network expansion.
TAC has been able to maintain its market share at around 30% since 2002. This success is largely driven by innovative price promotions, a segmented approach to meet consumer and corporate customer needs, and a customer-oriented strategy. As of the first quarter of 2006, TAC had a total of 9.8 million subscribers, a 13% increase from the end of 2005; the number of subscribers surpassed 10 million in April 2006. Prepaid customers are the major growth engine for service revenues. The company owns a network that covers more than 90% of the population, and plans to expand further especially in upcountry regions, where there are still more rooms for growth. TAC has planned to increase its non-voice revenues by improving network capacity in preparation for Enhance Data-rates for GSM Evolution (EDGE) and 3G technology.
TAC is also expected to benefit from the recent additional investment by Telenor in terms of managerial assistance through key management and director positions appointed by Telenor. Telenor’s direct ownership of TAC increased from 29.9% in 2000 to 32.9% after the tender offer in December 2005. At the end of the first quarter of 2006, Telenor’s economic exposure (direct and indirect) in TAC was 70.2%.
TAC has been successful in lowering its financial leverage. The debt to capitalization ratio has improved from 60% in 2003 to 49% at the end of March 2006. Although the company’s US$300 million Yankee bond issue will come due in November 2006, TRIS Rating expects that the company will be able to refinance it. The funds from operations (FFO) to debt ratio has almost doubled from its 2001 level, driven mainly by healthier operating performance. However, huge capital expenditures for network expansion and 3G technology are expected in the near future and this will likely keep TAC from further de-leveraging its balance sheet.
Rating Outlook
The “stable” outlook is based on the expectation that TAC, under the helm of its current skilled management team, will sustain its competitive position and will be able to generate sufficient FFO to expand the network without raising its financial leverage. The outlook is also based on the expectation that the new telecommunications regulations introduced by the National Telecommunications Committee (NTC) will not have an adverse impact on TAC’s operating performance.
Key Rating Considerations
Strengths/Opportunities
? Second largest cellular-phone operator in Thailand
? Growing demand for mobile phone services
? Improving financial profile
? Draw on experience of Telenor Group
Weaknesses/Threats
? High price competition
? Uncertain telecom regulations
? Large capital expenditures during the next three years
Corporate Overview
TAC was founded in August 1989 to provide wireless telecommunication services in the 800 MHz and 1800 MHz frequency bands in Thailand under a 27-year BTO (Build-Transfer-Operate) concession granted by CAT Telecom PLC (CAT). The concession will expire in 2018. In 1994, TAC entered into an Access Charge Agreement with TOT PLC (TOT). Under both agreements, TAC is required to pay TOT Bt200 per subscriber per month from postpaid subscribers and 18% of revenues of prepaid subscribers, and pay CAT 20% of mobile service revenues, net of the TOT’s access charge. The percentage of revenue sharing to CAT will rise to 25% from September 2006 to 2011, and will rise again to 30% until the end of the concession.
As of March 2006, TAC’s cellular-phone service revenue was accounted for 97% of its total revenues. Domestic voice service revenues contributed around 80% of cellular-phone service revenue, where 64% of domestic voice service revenue was from prepaid subscribers and 36% was from postpaid subscribers. International roaming and value-added services, such as SMS, MMS, and GPRS, contributed about 12% of service revenue. The total subscribers base was 9.8 million, divided into 8.2 million prepaid and 1.6 million postpaid. TAC offers mobile packages based largely on customer segmentation. Prepaid packages include “Happy” “Hey Ha” “Kra-Puk” and “Baby,” while postpaid packages include “ZAD” “Work” and “Maximize.”
Recent Developments
? Telenor now TAC’s largest shareholder
In 2000, Telenor forged an important strategic alliance with TAC through a direct investment in United Communication Industry PLC (UCOM). In October 2005, Telenor Asia Pte Ltd., a wholly-owned subsidiary of Telenor, and Thai Telco Holdings Ltd. (TTH), a Thai investment holding company, proposed to buy the remaining TAC shares in a mandatory tender offer, triggered by TTH’s acquisition of UCOM shares. The offer was finalized in December 2005. Prior to the tender offer, Telenor had a 29.9% direct ownership in TAC. Following the tender offer, their direct ownership is 32.9%. As at the end of the first quarter 2006, Telenor’s economic exposure (direct and indirect) in TAC was 70.2%. TAC has two major shareholders: UCOM with 41.64% and Telenor Asia with 32.9%.
Telenor is a leading telecommunication service provider in Norway and has substantial mobile operations in the Nordic regions, Central and Eastern Europe, and Asia. The company’s strategy for international markets is to integrate local expertise with the group’s know-how to derive benefits from cross-borders synergies.
INDUSTRY ANALYSIS
? Growth of new subscribers slows
After impressive growth of around 120% per annum during 2001 and 2002, the growth
rate of new mobile subscribers slowed down substantially to only 14% in 2005 as the penetration rate of mobile phones approached saturation. However, compared with penetration rates in other countries, Thailand still has room to grow during the next two to three years.
Table 1: Number of Mobile Phone Subscribers and Penetration Rate
2002 2003 2004 2005 1Q/2006
Market size (million) 17.5 22.2 27.0 30.2 32.4
Growth rate (%) 119 27 22 12 7
Penetration (%) 28 35 44 48 51
Sources: Websites of ADVANC, TAC, TRUE, and Bank of Thailand
? Prepaid customers account for more than 80% of total mobile subscribers
The tremendous growth in Thailand during 2001 and 2002 was attributed to the popularity of prepaid services launched in mid-1999 and the continuous drop in handset prices. As of March 2006, prepaid subscribers clearly dominated the market and accounted for approximately 87% of mobile-phone subscribers in Thailand.
Table 2: Prepaid and Postpaid Subscribers of 3 Largest Mobile Phone Operators (’000)
2002 2003 2004 2005 1Q/2006
Prepaid
ADVANC 8,136 11,124 13,064 14,409 14,716
TAC 4,204 5,383 6,510 7,212 8,185
True Move 877 1,540 2,928 4,009 4,449
Total 13,218 18,046 22,501 25,630 27,350
Postpaid
ADVANC+DPC 2,526 2,115 2,120 2,000 1,918
TAC 1,250 1,168 1,277 1,465 1,638
True Move 459 285 453 449 451
Total 4,236 3,568 3,849 3,914 4,007
Prepaid (%) 76 83 85 87 87
Postpaid (%) 24 17 15 13 13
Sources: Websites of ADVANC, TAC, and TRUE
? Narrower network coverage gaps among operators
ADVANC’s mobile phone network has been far more extensive than that of TAC and True Move, which enables ADVANC to maintain a competitive edge over its peers. However, the gap has narrowed because both TAC and True Move have spent budget heavily to improve their networks.
? Framework for interconnection charge formally announced
The progress of liberalization of the telecom industry has been slow, but it has gradually moved in the right direction. On 17 May 2006, the much-anticipated interconnection charge announcement was published in the Royal Gazette, giving it the effect of law. On 1 June 2006, three major mobile operators submitted their “reference interconnect offer” (RIO) of Bt1 per minute to the NTC. TOT and CAT have not submitted their RIO and asked the NTC for a 30-day extension. It takes the NTC 90 days to approve the rates and another 90 days for all operators to engage in bilateral agreements. It
is expected that interconnection rate will be settled by early 2007 at the earliest. However, details regarding access charges and concession conversions remain unclear at the moment.
Limitations on foreign ownership of Thai telecom operators remain an open issue. Proposed changes are in the process of public hearings on the third draft of the regulations. The draft limits foreign ownership to 49%. In addition, Thai telecom firm that is owned by foreign company, whose major shareholder is the foreign government, will be put on the “priority watch list” and must release a public report monthly. TAC faces the risk of being on the priority watch list and its operations will be closely scrutinized by the regulator (information as of March 2006). Other key regulations that are still in progress
are 3G licenses, antitrust regulations, number portability, and standard contracts between operators and customers.
TRIS Rating believes TAC’s business and financial operations will not be adversely impacted by the new regulatory regime.
However, should adverse regulatory changes happen, TAC is expected to try its best to
defend its competitive position and push for a level playing field. TRIS Rating will monitor the situation closely and will revise TAC’s
ratings should any significant developments arise.
BUSINESS ANALYSIS
? TAC maintains second position
Despite the fact that the competitive environment has been intense, TAC has proved
to be a formidable player in the Thai telecom market by maintaining its market
share at around 30% since 2002.
Table 3: Market Share of Mobile Phone Operators in Thailand
2002 2003 2004 2005 1Q/2006
ADVANC+DPC 61 60 56 54 51
TAC 31 30 29 29 30
True Move 8 8 13 15 15
Others 0 3 2 2 3
Sources: Websites of ADVANC, TAC and TRUE
TAC bases its business strategy around the concept of “value-for-money.” Since the launch of its new brand “DTAC” in 2001, the company has constantly focused on customer service, innovative packages, and a segmented approach to meet consumer and corporate customer needs in order to attract new subscribers and retain existing customers. The organization structure has changed from product-oriented to be more customer-oriented, emphasizing the objective to create value for subscribers.
? Postpaid ARPU declines, while prepaid ARPU rises
As of March 2006, TAC’s average revenue per user (ARPU) for postpaid subscribers declined 10% year on year to Bt911, due to price cutting. On the other hand, ARPU for prepaid subscribers has shown more price elasticity amid cheap price promotions by rising 8% in the same period to Bt310, due to a positive impact from higher minutes of use (MOU). Despite the fact that prepaid subscribers make up around 83.3% of total subscribers and show a more promising growth rate, TAC faces a challenge to create more brand loyalty as prepaid subscribers tend to change their mobile service providers more often.
Given the strategic importance of the prepaid market, TAC plans to launch innovative offerings to attract new customers and counter price competition with short-term promotions to retain existing subscribers. The focus of the postpaid market is on revitalizing the market by tapping working people and high-end segments. Though TAC intends to steer away from offering tariff-cutting promotions, the low-price campaigns
are expected to continue, at least until the implementation of the interconnection charge (IC). The expectation is that operators who can build on extensive customer base will benefit by being the net receiver of the IC. TAC has also launched promotions, such as ZAD 5 and Kra-Puk, to encourage users to call within its own network in order to avoid paying the IC when the regulation is in place.
? Growth from upcountry and value-added services
TAC will use a more aggressive business strategy to increase market share upcountry where there are more growth opportunities than in Bangkok. Another key revenue driver is value-added services (VAS). As of March 2006, VAS contributed 7% of service revenues, up from 5% the same quarter last year, largely due to an increase in usage of SMS, MMS, WAP, and GPRS.
? Telenor involvement to remain at current level
Over the years, TAC has constantly received the benefit of managerial assistance
from Telenor. As of March 2006, five out of nine board members and some key management positions in TAC are appointed by Telenor. However, Telenor is not expected to become more involved in TAC’s operation or exert control over any decision making more than
the current level. In addition, TAC is not expected to receive any financial assistance
in terms of guarantees from Telenor.
FINANCIAL ANALYSIS
TAC’s financial policy has been moving in a more conservative direction, characterized
by improving leverage and full hedging of all foreign-currency debt. However, high capital commitments for network expansion will cause the leverage ratio to stay at the current level in
the intermediate term. The company’s target is to have the debt to equity ratio less than 1.
? Cash flow protection measures improving
TAC’s cash flow protection measures have been improving over the past few years. FFO to net debt ratio was at 29% in 2005, doubling from 14% in 2001. However, the ratio
is not expected to improve further due to the huge capital expenditures needed to finance network improvements. Capital expenditures
are projected to be around Bt12,000 million in 2006. The number is expected to be higher if price wars do not subside.
TAC plans to refinance its US$300 million Yankee bond, which will mature in November 2006, by issuing Bt6,000 million in debentures
and drawing down the available Finnish Export Credit loans and bank syndicated
loans. The refinancing risk is believed to be manageable through TAC’s long relationship
with many financial institutions and its ability to raise funds in the bond market. As of March 2006, the company had Bt861 million in cash
on hand, while available short-term credit facilities were around Bt5,000 million.
? Operating margins, excluding regulatory costs, stable at 70%
For the first quarter of 2006, the ratio of operating income before depreciation and amortization to sales (operating margin) was 36%, down from 38% in the same period last year, largely driven by higher regulatory costs from prepaid subscribers and higher marketing expenditures. Excluding regulatory costs, operating margin was relatively stable at
70%. TAC’s competitive position will be weaker than ADVANC after the fourth quarter
of 2006 when the revenue share paid to CAT will rise from 20% to 25%. This will provide ADVANC with more competitive edge since
its regulatory costs are around 13% lower than TAC.
Table 4: Debt Profile as of 31 March 2006
Issuer Type Size (Mil) Balance (Bt mil) Maturity Date
Trust Receipts - - 564 2006
P/N - Bt900 900 Apr 2006
TAC064A Amortized Bt15,000 1,071 4 Apr 2006
Convertible Bonds Bullet US$220 38 31 May 2006
Yankee-06 Bullet US$300 13,306 4 Nov 2006
Syndicated Bullet Bt4,000 4,000 18 Nov 2007
TAC089A Bullet Bt3,000 3,000 25 Sep 2008
TAC089B Bullet Bt2,500 2,500 25 Sep 2008
TAC09OA Bullet Bt4,000 4,000 30 Oct 2009
TAC09OB Bullet Bt1,000 1,000 30 Oct 2009
NIB #1 Amortized US$30 1,271 30 Jun 2010
TAC109A Bullet Bt3,500 3,500 25 Sep 2010
NIB #2 Amortized US$40 1,644 31 May 2015
Total - - 36,794 -
Source: TAC
? Financially conservative target
At the end of March 2006, the company had Bt36,800 million in interest-bearing debt, compared with Bt39,900 million in the previous quarter. The debt to capitalization ratio was
49%, down from 54% at the end of 2004, and from 60% in 2003. Over the years, TAC has successfully reduced its leverage and has moved the debt to equity ratio closer to a target of 1. Given the pressure on operating margin due to the price wars and the substantial capital investments needed, TAC’s financial leverage is expected to remain at the current level in the intermediate term, and gradually improve in the long term.
Financial Statistics and Key Financial Ratios*
Unit: Bt million
-------------------Year ended 31 December-------------------
3/2006 ** 2005 2004 2003 2002 2001
Sales and service revenues 12,179 43,198 38,943 31,781 32,001 30,100
Gross interest expense 862 3,573 2,496 2,806 2,871 3,122
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