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

KEY RATING DRIVERS
Dominant Mobile Market Position: The ratings reflect Fitch's expectations that CML would be able to maintain its dominant position in China's mobile market over the medium term due to its significant economies of scale, robust financial position and solid execution ability. In 2015, CML's mobile service revenue market share remained high at 67%. At end-February 2015, CML controlled a mobile subscriber share of 64% and it attracted 360 million 4G subscribers since the launch of its 4G services in the beginning of 2014.

OTT Substitution: Fitch expects competition from over-the-top (OTT) operators and the continued substitution of data for voice services to put pressure on average revenue per user (ARPU) and margins. CML's voice revenue declined 16% yoy in 2015. CML in 2015 still received 53% (2014: 62%) of its mobile service revenue from voice, short-messaging and multimedia messaging services, which tend to command higher margins but have higher substitution risk. Mobile service revenue fell 2% yoy in 2015.

Limited Impact from Tower Sharing: Fitch does not expect tower sharing to materially alter CML's credit profile. EBITDA margins will be under slight pressure due to higher tower usage fees in the short term. However, likely improvement in tower operating efficiency and tower co-usage over the medium term may lower unit usage fees. CML expects potential savings in depreciation and network maintenance to cover the higher tower usage fees. Capitalisation of tower leasing fees will increase adjusted leverage, but CML will remain in a net cash position and have only CNY5bn in debt.

Sizeable Capex: Fitch expects CML to maintain sizeable capex in the next two years to improve its 4G network quality and data service competitiveness. CML's 4G capex cycle peaked in 2014 and it has reduced its 2016 capex budget to CNY186bn (2015: CNY196bn). However, its 2016 capex budget is still much higher than its annual capex prior to 2014. Fitch expects sizeable capex to constrain pre-dividend free cash flow (FCF) margin at around 10% in the next one or two years.

Constrained by Sovereign Ratings: CML's ratings are constrained by China's sovereign rating (A+/Stable) as CML is ultimately controlled by the state. CML's standalone rating is 'AA-'.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for CML include:
- low single-digit revenue growth with the decline in voice revenue offsetting data revenue growth
- EBITDAR margin at 45%-46% in two to three years
- Capex of CNY186bn in 2016 and CNY150bn-170bn in 2017-2018
- Dividend payout ratio to remain at around 43%

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to a downgrade of the standalone rating to 'A+' include:
- reversal of its net cash position
- pre-dividend FCF margin falling below 8% on a sustained basis (2014: 9%)
- Operating EBITDAR margin falling below 40% on a sustained basis (2014: 42%)

CML has high rating headroom and Fitch therefore does not envisage a downgrade of the standalone rating to 'A' from 'AA-' over the medium term.

As CML's ratings are constrained by the sovereign's rating, any downgrade of the sovereign will lead to a corresponding downgrade in CML's ratings.

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- A positive rating action on the sovereign

LIQUIDITY
Ample Liquidity: We expect CML to maintain a strong net cash position. At end-2015, readily available cash balances of CNY403bn significantly exceeded total debt of just CNY5bn. CML has no maturities due before October 2017.