Industry consolidation to boost Asian telcos’ profitability – Fitch
Market position and financial structure are crucial factors in the growing sector
The telecom industry consolidation in Asia is expected to bring growth and innovation to the region as operators adapt to the demands of the 5G era to rise in the competitive market.
A report from Fitch Ratings showed that consolidation in Asia’s market, including Malaysia, Indonesia, and India, will lead to growth in profitability as mobile competition becomes more rational.
The credit rating agency added that further industry consolidation is expected as scale becomes a crucial factor in the sector, and operators are striving to strengthen their position in the market. The focus of competition under 5G national plans has also shifted from infrastructure to service innovation in a bid to develop wider ecosystems and user cases.
Market status and financial structure have emerged as significant differentiating factors for telcos in the Asia-Pacific region as firms continue to invest in spectrum and network upgrades to preserve their competitive capabilities in the crowded landscape.
According to Fitch, the deployment of 5G technology will favour operators with scale and strong balance sheets which may contribute to diverging credit quality over time across the peer group.
Meanwhile, Fitch anticipates telcos’ median 2023 leverage to remain stable before increasing slightly in 2024. Free cash flow generation will improve in the near term with better profitability but will remain limited, as modest EBITDA growth will be consumed to build or expand 5G infrastructure and invest in non-telecom segments.
Most of the telcos covered in the Fitch report have moderate to high rating headroom, indicating their focus on capital preservation through staggered 5G investments, and controlled dividends and asset sales.
In the report, Singapore Telecommunications Limited (A/Positive) and SK Telecom Co., Ltd (A-/Positive) have high rating headroom and Positive Outlooks with improving leverage ratios, while PT XL Axiata Tbk (BBB/Negative) has a Negative Outlook due to its linkage with its parent company, whose credit profile has weakened recently.