Fitch Ratings: Coronavirus Data Traffic to Raise Capex for APAC Telecom

(The following statement was released by the rating agency) Fitch Ratings-Singapore/Sydney-March 29: The greater need for data connectivity amid the COVID-19 pandemic will support demand for telecom services, although the ability to increase the return on network investments will remain a challenge for Asia-Pacific (APAC) telcos, says Fitch Ratings. The longer-term effects of elevated data traffic will accelerate capex investment to support additional network capacity, more so in markets with under-developed fixed-line infrastructure. Fitch expects the growth in telecom revenue to lag behind data consumption, as telcos are seldom able to price data to capitalise fully on the rapid growth in traffic. Some telcos have offered larger data allowance while maintaining current price plans as part of their response efforts. This is despite declining roaming revenues due to curbs on overseas travel. Closure of retail outlets due to self-isolation and quarantine measures imposed in some countries could also lead to slower gross subscriber additions in prepaid markets reliant on traditional distribution networks. Depending on how long the pandemic continues, the rising use of online connectivity and remote access technology from home is likely to drive the need for greater capacity to maintain network resilience. Opensignal, a mobile analytics company, reported deterioration in Italy's mobile network performance as a result of significantly slower 4G download speeds, following the government's country-wide restrictions. It is still too early to assess the full impact of these effects on APAC telcos' capex budgets, but we believe much of the investment will be front-loaded to cater for the near-term surge in data traffic. Over-the-top video streaming services such as Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) Prime Video are temporarily switching to standard from high-definition to ease bandwidth pressure on telecom networks in the US and Europe. Meanwhile, the Indian and Philippine governments are calling for similar measures. Telecom markets with developed fibre-broadband infrastructure and fiberised networks such as South Korea and Singapore are better-positioned to cope with demand than emerging markets in Indonesia, India, the Philippines and Thailand where mobile remains the dominant platform for broadband access. Fixed-broadband markets in these countries are significantly under-served due to the limitations of fixed-line infrastructure. Telecom services in India and the Philippines rank the highest in our portfolio in terms of average capex intensity, at around 40%, compared with the mid-20s average for the region. Fitch expects most telecom markets in the region to depend on existing long-term evolution (LTE) and LTE Plus technologies to provide sufficient speed to cater for data demand in the next few years. The promise of 5G's ultra-speeds and low latency could provide mobile-only operators a cost-effective solution to offer fixed-wireless broadband services to address fixed-line network limitations. However, a prolonged disruption in supply chains could delay 5G handset launches and the building of ecosystems. The momentum of 5G rollouts in these markets will depend on the affordability and availability of compatible 5G devices. The sector outlook on APAC telecoms has been negative since end-2019 after Fitch revised it from stable, reflecting the narrowing rating headroom following a prolonged period of intense competition, high capex and shareholder returns. Most of the markets in the region have negative free cash flows as operating cash flows lag behind investment outlays. There are five entities on Negative Outlook in our portfolio of 20 public foreign-currency Issuer Default Ratings, following the downgrades since February 2020 for Singapore Telecommunications Limited (A/Stable) and its closely linked subsidiary, Singtel Optus Pty Limited (A-/Stable). Eight entities have low rating headroom. We expect telcos to undertake prudent capital preservation to accommodate future 5G investment. Contact: Janice Chong Director +65 6796 7241 Fitch Ratings Singapore Pte Ltd. One Raffles Quay South Tower #22-11 Singapore 048583 Steve Durose Managing Director +61 2 8256 0307 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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