Technological challenges apparent
Moody’s Investors Service says that the outlook for the telecommunications industry in Asia Pacific is stable, but will also face headwinds from technological changes.
“Three factors drive the stable outlook; expectations of  year-on-year average revenue growth of about 2.0%-2.5% over the next 12-18 months;  EBITDA growth of 0%-2%, although average margins will contract slightly next year; and  capex — as a percentage of revenue — remaining elevated at around 25%,” says Nidhi Dhruv, a Moody’s Vice President and Senior Analyst.
“However, organic revenue growth is slowing, although the pace varies by country, due to increasing mobile penetration rates, ongoing competition, and technological headwinds,” adds Annalisa Di Chiara, Moody’s Vice President — Senior Credit Officer.
Moody’s conclusions are contained in its just-released “Telecommunications — Asia Pacific, Outlook stable despite longer-term technological headwinds”. The outlook reflects Moody’s expectations for fundamental business conditions in the industry over the next 12-18 months.
India (Baa3 positive) will be the only country in Asia where industry-wide revenue is declining due to unprecedented price competition spurred by a new entrant. In the other emerging countries, we expect revenue growth of about 3.5% in 2018, lower than forecast GDP growth of about 5.8%. And revenue growth in the developed markets in the region will remain in line with expected GDP growth of around 1.5%.
Overall for the region, the average EBITDA margin for Moody’s-rated telecommunications companies in Asia Pacific will contract to around 39%-40% over the next 12-18 months, reflecting intensifying competition, higher costs for providing data services, and investments in margin-dilutive digital businesses.
Meanwhile, capex to revenue will fall to around 25% in 2018 from 27% in 2016, although remaining elevated for most operators as they continue to build out their 4G networks to handle larger volumes of data traffic. In this context, we do not expect meaningful capex towards 5G over the outlook period.
As indicated, the telecom business continues to evolve due to technological changes and the increasing acceptance of the internet of things, and companies need to diversify their revenue sources amid sustained declines in the traditional voice telephony and SMS businesses.
We expect companies will continue to expand into digital media, advertising, and mobile payments to future-proof their revenue streams.
Despite high levels of spending, we expect leverage to be stable in the outlook period, implying that the companies are generally able to fund capital spending with cash and operating cash flow.
Average debt to EBITDA will remain relatively unchanged around 2.2x-2.4x in 2018 — similar to 2016 — as incremental debt for capital spending and shareholder returns is offset by modest growth in EBITDA
Furthermore, liquidity will be strong with most companies’ internal cash sources sufficient to cover their cash requirements over the next 12 months.
A positive outlook would be likely if we expect revenue growth to outpace GDP growth, EBITDA margins to increase two to three percentage points, and capex-to-revenue to stabilize near 15%-18%.
A negative outlook would be likely if we expect revenue growth to fall consistently below GDP growth, EBITDA margins to weaken more than three to four percentage points, and capex-to-revenue to consistently exceed 25%.