The industry is no stranger to upheaval. Deregulation and consolidation have taken their grip over the past few years, successfully transforming it from an outright monopoly into a competitive market. As the industry continues to modernize and liberalize, the three biggest players are setting the pace: Chunghwa Telecom Co. Ltd. (Chunghwa Telecom; global scale rating AA/Stable/--; national scale rating twAAA/Stable/twA-1), Far EasTone Telecommunications Co. Ltd. (Far EasTone; global scale rating A-/Stable/--; national scale rating twAA+/Stable/twA-1), and Taiwan Mobile Co. Ltd. (Taiwan Mobile; national scale rating twAA+/Watch Neg/twA-1).
For two of these players, at least, changing industry conditions have had a largely positive effect. The credit profiles of Chunghwa Telecom and Far EasTone have improved over the past few years due to solid cash flow generation and substantial debt repayment. As a result, Standard & Poor's Ratings Services raised the global scale foreign currency corporate credit rating on Chunghwa Telecom to 'AA/Stable/--' from 'AA-/Watch Pos/--' on Jan. 22, 2007 and the foreign and local currency ratings on Far EasTone to 'A-/Stable/--' from 'BBB+/Stable/--' on March 2, 2006.
Taiwan Mobile hasn't fared so well. Taiwan Ratings Corp., a subsidiary of Standard & Poor's, placed the 'twAA+/ twA-1' national scale corporate credit rating on CreditWatch with negative implications on March 2, 2007, following the company's plans to gain full ownership of a fixed-line affiliate. This highlighted the need for companies to balance their investment appetites with a solid financial footing.
Three factors help in evaluating industry trends and the motivation for future change:
+ Industry dynamics and market conditions;
+ Capital management; and
+ Investment activities.
Industry dynamics and market conditions
Regulatory uncertainty clouds stable outlook Taiwan's telecom and broadcasting regulator, the National Communication Commission (NCC), is placing the tariffs that leading operators charge under tighter scrutiny. Formed in November 2005, the commission is already making an impact by approving or rejecting the tariff schemes of operators with a market share of 25% or higher and by setting their general terms of service. Its aim? To ensure a fair competitive environment for all telecom operators and stimulate market competition by increasing customer choice over service providers and pricing structures.
Tariff cuts that take effect over the next three years, starting in April 2007, will likely dampen earnings for the leading service providers--but only marginally. This should allow major operators to maintain sound financial profiles over the medium term. Under the NCC proposals, the three biggest players must lower their mobile voice tariff by at least 4.88% a year over the next three years, with the asymmetric digital subscriber line (ADSL) circuit rate scheduled to drop by at least 5.35% (see table 1).
Chunghwa Telecom will be the hardest hit, as it faces a 5.35% tariff cut for its dominant ADSL services in 2007. The operator forecasts that this will slice off Taiwan dollar (NT$) 2 billion from its revenue this year. For the other two wireless operators, the revenue impact will be less significant, ranging from NT$300 million to NT$350 million, or less than 1% of their total revenue.
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