China telecoms Capex to decline in 2018 and 2019 despite 5G plans

China Telecoms profitability forecastFitch Ratings said it expects steady EBITDA and a decline in Capex in 2018 and 2019 to boost Chinese operators’ FCF and offset an increase in dividend payments, leading to a slight reduction in leverage.

Average net leverage ratios for China Mobile (CML, A+/Stable) and China Telecom (CTCL, A+/Stable) are likely to improve further to below 0x and 2.0x, respectively, by 2019.

“FCF will continue to improve in 2018 and 2019 as CFFO should rise by a moderate extent and operators are likely to continue to trim investment in 4G,” said Kelvin Ho of Fitch Ratings.

Major 5G Capex spending is some years away. China Mobile’s 5G investment may start from 2019 at the earliest, but any initial 5G spending is likely to be limited. The increase in CFFO should be more than enough to cover dividend increases.

Mobile competition has intensified due to the introduction of unlimited data plans. Competition will remain rational and the risks manageable, though China Mobile’s higher-end customer segments may be affected.

Broadband competition has also increased due to China Mobile’s aggressive customer-acquisition approach. However, emerging businesses – such as internet data centres, cloud computing, big data and internet of things – should continue to support China Telecom’s fixed-line revenue.

Moreover, China Telecom’s mobile strength should remain strong as it continues to gain market share in 4G.

China Mobile’s and China Telecom’s EBITDA increased 5 percent and 4 percent in H1 2017, respectively.

Capex of telecom operators in China will fall further. China Telecom’s 4G network rollout and fibre broadband upgrade are both largely complete. Its strategic alliance with China Unicom (Hong Kong) on network sharing plus China Telecom’s 800MHz re-farm for 4G use may result in more meaningful Capex savings from 2018.

China Mobile is likely to cut 4G Capex, but may commence 5G Capex spend earlier than the others. There will be some 5G trials in 2019, but larger-scale deployment is only likely from around 2020.