OREANDA-NEWS. Fitch Ratings has affirmed China Telecom Corporation Limited's (CTCL) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) at 'A+' with a Stable Outlook.

KEY RATING DRIVERS
Government Support: The ratings benefit by one notch from state support and CTCL's strategic importance to the Chinese sovereign (A+/Stable) - the company's ultimate majority owner. CTCL is 71% owned by China Telecommunications Corporation, which is 100% owned by the State-owned Assets Supervision and Administration Commission. The state owns 82.85% of CTCL when all state shareholders are included.

Dominant Fixed-line Market Position: The ratings reflect CTCL's dominant status in southern China for fixed-line and broadband services. Its market position enables CTCL to continue offering bundled services and differentiated information, content and technology services and value-added services. Resilient fixed-line revenue should continue to support fixed-line free cash flow (FCF) and help fund CTCL's mobile capex. Fixed-line service revenue edged up 1% yoy in 2015, despite unfavourable policies to cut the fixed-line broadband unit price by 55%.

Solid Mobile Execution: The ratings also reflect CTCL's ability to grow its mobile business, despite being a latecomer. CTCL slightly increased its mobile service revenue share to 15% in 2015 (2014: 14%), even though it only received its 4G licence in February 2015 and China Mobile Limited (CML, A+/Stable), China's leading mobile operator, had a one-year head start in 4G. CTCL is now the second largest 4G operator in China, with 69 million 4G subscribers (14% market share) in February 2016, compared to China's second-largest mobile operator China Unicom (Hong Kong) Limited's (CUHKL) 55 million 4G subscribers.

Tower Sharing Benefits: Tower sharing should help CTCL gain access to CML's abundant network resources, speed up 4G network rollout and save capex over the medium term. However, capitalisation of tower usage fees will boost CTCL's adjusted net leverage to over 2x in the next 12-18 months, before trending down to below 2x in 2018. EBITDA margins will be under some pressure in the short-term due to higher tower usage fees. However, likely improvement in tower operating efficiency and co-usage over the medium-term should lower unit usage fees.

Higher Capex: The ratings also reflect Fitch's expectations that CTCL's capex will stay high in the next one or two years, driven by 4G network rollout and accelerated fibre upgrade. CTCL's 2016 capex budget, at CNY97bn (2015: CNY109bn), is higher than its historical average annual capex and CUHKL's 2016 capex budget of CNY75bn. However, Fitch believes the strategic alliance with CUHKL on network sharing plus potential 800MHz re-farm for 4G use will likely result in more meaningful capex savings from 2018. CTCL's pre-dividend FCF will likely turn negative in 2016 before returning to positive in the following year.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for CTCL include:
- low single-digit revenue growth in the next two to three years
- EBITDAR margins at about 32% in one to two years
- capex of CNY80bn-100bn in 2016 and 2017
- dividend payments at about CNY6.5bn for each of 2016 and 2017

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating actions include:
- FFO-adjusted net leverage above 2x on a sustained basis (2014: 1.4x)
- EBITDAR margin below 30% on a sustained basis (2014: 32%)
- weakening in linkages with the state, which is not envisaged in the foreseeable future

Positive: Due to CTCL's smaller mobile market share relative to its major competitors', as well as its likely lower profitability and higher capex, a rating upgrade is unlikely in the medium term.

LIQUIDITY
Adequate Liquidity: Fitch believes CTCL will maintain adequate liquidity. CTCL's unrestricted cash position amounted to CNY34bn at the end of 2015. While debt due within one year totalled CNY52bn at end-2015, CTCL has strong support from its state-owned parent, CTC, and Chinese banks. At the end of 2015 unutilised committed credit facilities were CNY128bn and about 53% of its CNY117bn total debt was owed to its parent.