Asian telecom companies have so far weathered the effects of technological change, but the industry faces a rough road ahead, says Moody's Investors Service.
The industry will grow 2-2.5% year-on-year over the next 12-18 months, which will drive its stable outlook, said the bond rating agency. Growth of earnings before interest, tax, depreciation and amortisation (Ebitda) of 0%-2% will also contribute to stability, as well as a relatively high capital expenditure (25% of revenue), said Nidhi Dhruv, a Moody's vice-president and senior analyst.
However, average margins will contract slightly next year, said Moody's.
"Organic revenue growth is slowing, although the pace varies by country because of increasing mobile penetration rates, ongoing competition, and technological headwinds," said Annalisa Di Chiara, Moody's vice-president and senior credit officer.
Moody's recent report on Asia-Pacific Telecommunications noted India (Baa3 positive) will be the only country in Asia where industry-wide revenue is declining because of unprecedented price competition spurred by a new entrant.
Other emerging economies can expect revenue growth in the vicinity of 3.5% in 2018, lower than forecast GDP growth of 5.8%. In contrast, revenue growth in developed Asian markets will remain in line with expected GDP growth of around 1.5%.
The average Ebitda margin for Moody's-rated telecommunications companies in Asia-Pacific will contract to 39%-40% over the next 12-18 months, reflecting growing competition, higher costs of data services, and investments in margin-dilutive digital businesses.
Capex to revenue will fall to around 25% in 2018 from 27% in 2016, although it will remain elevated for most operators as they continue to build out their 4G networks to handle larger volumes of data traffic. Investors should not expect "meaningful capex towards 5G over the outlook period," said Moody's.
As technological changes and increasing acceptance of the Internet of Things put pressure on the telecom industry, companies need to diversify their revenue sources amid sustained declines in the traditional voice telephony and SMS businesses.
Companies will continue to expand into digital media, advertising, and mobile payments, but leverage will be stable in the outlook period, implying the companies are generally able to fund capital spending with cash and operating cash flow.
Average debt to Ebitda will remain at around 2.2-2.4 in 2018 -- similar to 2016 -- as incremental debt for capital spending and shareholder returns are offset by modest growth in Ebitda, said Moody's.
Liquidity will be strong, with most companies' internal cash sufficient to cover their cash requirements over the next year, said Moody's.
