OREANDA-NEWS. Fitch Ratings has affirmed China Mobile Limited's (CML) Long-Term Foreign-Currency and Local-Currency Issuer Default Rating (IDR) 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 over the medium term due to its significant economies of scale, robust financial position and solid execution ability. In 2014, CML's mobile service revenue market share remained high at 68% compared with 69% in 2013. At end-February 2015, CML controlled a mobile subscriber share of 62% and also attracted 123m 4G subscribers since the launch of its 4G services in the beginning of 2014.

OTT Substitution Risk: We expect competition from over-the-top (OTT) operators and the continued substitution of data for voice services will likely put pressure on average revenue per user (ARPU) and margins. CML's voice revenue continued to decline by 13% yoy in 2014 following its first fall in 2013. In 2014, CML still received some 59% (2013: 67%) of its service revenue from traditional voice and short message service services, which tend to command higher margins but have higher substitution risk.

VAT Reform Burden: The ratings also take into consideration the effect on EBITDA of the full-year impact of the value-added tax (VAT) reform, which was implemented in June 2014. However, Fitch believes that the impact of the VAT reform is likely to be short-lived. As VAT is implemented in more industries, CML's profitability should recover due to an expected increase in input VAT credits. Also, we expect that CML will transform its revenue mix, raising value-added services to reduce output VAT liabilities.

Sizeable Capex: Fitch expects that CML will incur relatively high capex for the next three-five years, as the company will invest heavily in 4G technology to boost its network quality and data service competitiveness. CML has reduced its 2015 capex budget to CNY200bn. However, its 2015 capex budget is still substantially higher than its previous annual capex, except in 2014. Fitch expects sizeable capex to constrain pre-dividend free cash flow (FCF) margin to below 10% in the next two years.

Tower Sharing: The ratings also reflect our expectations that the Chinese government's tower sharing initiative is unlikely to materially alter CML's credit profile. We believe tower sharing will enable China Telecom Corporation Limited (CTCL; A+/Stable) and China Unicom (Hong Kong) Limited to gain access to CML's network resources and improve their network quality and coverage as well as save capex over the long term. However, CML should get a significant amount of cash proceeds from the injection of tower assets into the national tower company.

Ample Liquidity: We expect CML to maintain a strong net cash position, even after considering the sizeable capex. At end-2014, unrestricted cash balances of CNY419bn significantly exceeded total debt of just CNY5bn. CML has no maturities due before 2017.

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 our rating case for the issuer include:
- low single-digit revenue growth with the decline in voice revenue offsetting data revenue growth
- EBITDA margin at 36%-37% in two to three years, compared with over 40% prior to 2013
- capex of CNY200bn in 2015 and CNY160bn-180bn in 2016-2017
- 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 (2013: 16%)
- Operating EBITDAR margin falling below 40% on a sustained basis (2014: 42.5%)

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 sovereign rating action