Fitch Ratings Ltd yesterday cut Chunghwa Telecom Co’s (中華電信) long-term foreign currency and local currency Issuer Default Ratings (IDR) to “AA-” from “AA” on expectations that the nation’s biggest telecoms company would see a further decline in margins because of intensifying competition and new pricing rules over the next three years.
Despite this, Chunghwa maintains a solid net cash position and remains the highest-rated telecoms operator in the world by Fitch, the agency said in a report yesterday.
Over the past two years, unfavorable market conditions have driven down Chunghwa’s earnings before interest, tax, depreciation and amortization (EBITDA) margin to 45.5 percent this year and 46.7 percent last year, Matt Jamieson, senior director and head of Fitch’s Asia Pacific telecom research team, said in the report.
Its EBITDA margin is expected to drop further over the next three years as a result of annual tariff reductions, revised fixed-to-mobile collection and interconnection charges, the report said.
The company would also face more margin headwinds because of its ongoing expansion into new and low-margin businesses such as corporate information and communication technology solutions and data centers, it said.
Fitch said the latest rating downgrade also reflected Chung-hwa’s weaker ability to generate free cash flow (FCF). The agency now expects the company’s pre-dividend FCF margin to fall to 27 percent this year, from 39.5 percent in 2006.
Fitch added that Chunghwa’s shareholder return FCF margin dipped into negative territory last year as the company retained its policy of giving high shareholder returns — including dividends and capital reductions — of more than 10 percent in 2006 and 2007, it added.
Negative rating actions may occur if Fitch’s projected EBITDA margin falls below 40 percent on a sustained basis, or if post--shareholder return FCF margins fall below 2 percent for two consecutive years, Fitch said.
Another reason would be if the company loses its strong net cash position, the ratings agency said.
On Wednesday, Chunghwa said sales last month edged up 1.2 percent year-on-year to NT$15.78 billion (US$516.8 million) as increased smartphone sales and value-added services helped offset the effects of an annual 5.87 percent cut in voice charges.
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