S&P: China Mobile 'AA-' Rating Affirmed With Negative Outlook; SACP Revised Upward To 'aa' From 'aa-'
We revised our assessment of the SACP of China Mobile to 'aa' from 'aa-' to reflect the company's improving competitive position in the telecommunications market in China. We expect the company's positive operating performance to be supported by its first-mover advantage in the 4G market and enhanced product diversity with the addition of wireline broadband services.
We expect China Mobile's leading advantage in 4G development will continue to support its operating performance in the next 12-24 months. Before its transition to 4G, the company had difficulty maintaining its market share due to its lagging 3G TD-SCDMA technology while its peers operated 3G networks using internationally accepted standards. We expect China Mobile to continue to maintain a dominant share in the mobile market in China, which is rapidly shifting to 4G. We believe the company's subscriber mix will shift to 4G users as consumers migrate to newer and faster services, which would support higher average revenue per user (ARPU) and subscriber growth. 4G customers accounted for 51% of China Mobile's total mobile customers for the first half of 2016, compared to 38% in 2015. In addition, China Mobile accounted for more than 70% of 4G subscribers in China as of end June 2016. However, its operating performance may deteriorate if the environment becomes more challenging due to intensifying competition or regulatory pressure to lower tariffs.
We expect China Mobile's improving product diversity in wireline broadband services after the acquisition of China Tietong Telecommunications Corp. to further support its competitive position in China. Although the percentage of broadband services to its total revenue remains limited, we believe the company can leverage its mobile subscriber base to offer bundled services to its customers, further enhancing its market position in China's telecommunications industry. China Mobile's market share in terms of broadband customers increased to 25.5% in first half of 2016, from 22.9% in 2015, and accounted for 62.3% of the net addition of customers for the first half of 2016.
In our view, China Mobile will continue to benefit from positive industry fundamentals in the country despite slower growth, given increasing data services and mobile penetration, in addition to a shift in subscriber mix to 4G users.
The rating on China Mobile reflects the company's leading position in the mobile telecommunications industry in China, with a network and customer base significantly larger than its domestic peers'. However, increasing competition in China's mobile communications industry and declining profitability temper these strengths. We assess the company's business risk profile as strong.
We expect China Mobile to maintain strong cash flow adequacy despite significant capital expenditure needs to support its infrastructure development. We do not expect the company's capital spending, potential mergers or acquisitions, or dividend payouts to materially hurt leverage over the next two years. As such, we expect China Mobile to remain in a significant net cash position after adjustments to surplus cash, in our base case.
The SACP revision has no impact on the rating, given our view that the rating on China Mobile is capped by the sovereign rating on China. This reflects our assessment of its very high likelihood of extraordinary government support, which reflects its very strong link with the government and very important role to the government. We expect the government will retain a controlling stake in China Mobile and continue to exert a strong influence on the company's strategy.
The negative rating outlook on China Mobile reflects the outlook on the sovereign credit rating on China (AA-/Negative/A-1+; cnAAA/cnA-1+).
We could lower the rating on China Mobile if we downgrade the sovereign. Other triggers include the central government reducing its support to the company because of a change in the government's strategies or priorities, or China Mobile's stand-alone credit profile weakens substantially to 'a-' or lower, from 'aa' now. We view both scenarios as unlikely over the next 12 -24 months.
We may revise the outlook on China Mobile to stable if we take the same action on the sovereign rating.