Fitch Affirms AIS at 'BBB+'/'AA+(tha)', AWN at 'AA+(tha)'

          Fitch Ratings has affirmed Thailand-based telecommunications company Advanced Info Service Public Company Limited's (AIS) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB+' with a Stable Outlook. The agency has also affirmed AIS's National Long-Term Rating at 'AA+(tha)' with a Stable Outlook and National Short-Term Rating at 'FFitch Ratings+(tha)'. At the same time, Fitch has affirmed subsidiary Advanced Wireless Network Company Limited's (AWN) National Long-Term Rating at 'AA+(tha)' with a Stable Outlook, its National Short-Term Rating at 'FFitch Ratings+(tha)' and its national senior unsecured rating at 'AA+(tha)'.

          KEY RATING DRIVERS
          AIS's and AWN's Ratings Equalised: AIS's and AWN's ratings are equalised, reflecting the strong links between the two companies, in line with Fitch's Parent and Subsidiary Rating Linkage criteria. AIS fully owns AWN, enabling it to control AWN's strategy, financial policy and investments. AWN is the main subsidiary within the group, accounting for 97% of group revenue and 85% of EBITDA in 2Advanced Info ServiceFitch Ratings7. It is of strategic importance to its parent as the operator of AIS's licensed business. AWN was awarded 2.Fitch RatingsGHz, Fitch Ratings.8GHz and 9Advanced Info ServiceAdvanced Info ServiceMHz licences and won the auction for an additional 5MHz of Fitch Ratings.8GHz spectrum in August 2Advanced Info ServiceFitch Ratings8.
          Data Supports Revenue Growth: Fitch expects AIS's service revenue, including mobile and fixed-broadband, to increase by around 5%-6% in 2Advanced Info ServiceFitch Ratings8 and 2Advanced Info ServiceFitch Ratings9 (Fitch RatingsHFitch Ratings8: 5%), supported by a continued rise in mobile-data usage and fixed-broadband subscribers. Mobile-service revenue is likely to increase by a moderate 3%-4% in 2Advanced Info ServiceFitch Ratings8, as strong growth in non-voice services will be partly offset by lower voice revenue. We forecast fixed-broadband revenue to increase to around THB4 billion in 2Advanced Info ServiceFitch Ratings8, from THB3 billion in 2Advanced Info ServiceFitch Ratings7 (Fitch RatingsHFitch Ratings8: THB2 billion). 
          Earning Improvement: Fitch expects AIS's operating EBITDAR to further improve in 2Advanced Info ServiceFitch Ratings8 to around THB78 billion, from THB74 billion in 2Advanced Info ServiceFitch Ratings7, led by revenue growth and margin improvement. The EBITDAR margin is likely to improve to 47%-48% in 2Advanced Info ServiceFitch Ratings8 and 2Advanced Info ServiceFitch Ratings9, supported by lower marketing expenses and regulatory costs. Marketing expense, including handset subsidies, as a percentage of AIS's service revenue fell to 6.6% in Fitch RatingsHFitch Ratings8, from 7.7% in 2Advanced Info ServiceFitch Ratings7. AIS's EBITDAR margin should also benefit from the cut in the universal service obligation fee in May 2Advanced Info ServiceFitch Ratings7 to 2.5Advanced Info Service% of licence holders' service revenue, from 3.75%. AIS's EBITDAR margin improved to 47.5% in Fitch RatingsHFitch Ratings8, from 46.6% in 2Advanced Info ServiceFitch Ratings7. 
          Flexibility to Support Investment: AIS's free cash flow (FCF) is likely to remain negative in 2Advanced Info ServiceFitch Ratings8 (2Advanced Info ServiceFitch Ratings7: negative THBFitch Ratings2 billion), but could turn positive in 2Advanced Info ServiceFitch Ratings9 due to lower spectrum payments and falling capex after AIS completes the major rollout phase of its 3G and 4G networks during the year. Network investment is likely to decrease to around THB25 billion-27 billion per annum in 2Advanced Info ServiceFitch Ratings8 and 2Advanced Info ServiceFitch Ratings9, compared with THB4Fitch Ratings billion-48 billion per annum over the previous two years. This should see FFO adjusted net leverage improve to around Fitch Ratings.5x-Fitch Ratings.6x in 2Advanced Info ServiceFitch Ratings9, from Fitch Ratings.7x in 2Advanced Info ServiceFitch Ratings7, to provide AIS with more rating headroom and financial flexibility to support additional investment. 
          Leading Market Position: AIS has maintained its leading market position as Thailand's largest mobile-phone operator. Fitch believes AIS should be able to maintain its service-revenue market share of around 5Advanced Info Service% in the medium term (Fitch RatingsHFitch Ratings8: 49%). AIS benefits from economies of scale due to its large subscriber base as well as a strong brand and extensive network coverage.

          DERIVATION SUMMARY
          AIS's credit profile is supported by its solid market position as Thailand's largest mobile phone operator and its conservative financial profile. AIS is rated higher than domestic peer, Total Access Communication Public Company Limited (DTAC), due to the latter's smaller size, weaker market position and lower profit margin. DTAC's 'BBB' ratings incorporate a one-notch uplift from linkages with its parent, Telenor ASA of Norway, which has strong board and management control of DTAC.
          AIS's ratings are at the same level as the 'BBB+' standalone credit profile of Malaysia's fixed-broadband operator, Telekom Malaysia Berhad (TM, A-/Negative). TM has a better business profile than AIS given its market dominance and benign competition in Malaysia's fixed-broadband market, but AIS has a stronger financial profile due to lower financial leverage, its larger size and wider EBITDAR margin.
          AIS is rated one notch above the Philippines' largest telecom operator, PLDT Inc. (BBB/Stable), due to its more conservative financial leverage of below 2.Advanced Info Servicex (PLDT: 2.6x-2.8x), offsetting its lack of product diversification. PLDT's ratings have also been somewhat affected by the country's moderate operating environment, which Fitch assesses at 'bb' based on its funding characteristics and weak systemic governance.

          KEY ASSUMPTIONS
          Fitch's Key Assumptions Within Our Rating Case for the Issuer
          - Mid-single-digit service revenue growth in 2Advanced Info ServiceFitch Ratings8 and 2Advanced Info ServiceFitch Ratings9 
          - Operating EBITDAR margin improving to 47%-48% in 2Advanced Info ServiceFitch Ratings8 and 2Advanced Info ServiceFitch Ratings9 (2Advanced Info ServiceFitch Ratings7: 45%) on lower handset subsidies and a cut in the universal service obligation fee 
          - THB25 billion-27 billion a year in network capex in 2Advanced Info ServiceFitch Ratings8 and 2Advanced Info ServiceFitch Ratings9 (2Advanced Info ServiceFitch Ratings7: THB4Fitch Ratings billion) 
          - 7Advanced Info Service% dividend payout ratio 

          RATING SENSITIVITIES
          Advanced Info Service Public Company Limited
          Developments that May, Individually or Collectively, Lead to Positive Rating Action
          - Positive FCF and an operating EBITDAR margin above 45%, both on a sustained basis
          Developments that May, Individually or Collectively, Lead to Negative Rating Action
          - FFO adjusted net leverage above 2.Advanced Info Servicex for a sustained period 
          - Unfavourable regulatory changes 

          Advanced Wireless Network Company Limited
          Developments that May, Individually or Collectively, Lead to Positive Rating Action
          - Positive rating action on AIS, provided linkages between AIS and AWN do not weaken
          Developments that May, Individually or Collectively, Lead to Negative Rating Action
          - Negative rating action of AIS

          LIQUIDITY
          Adequate Liquidity: AIS's liquidity should be manageable even though FCF is likely to be negative in 2Advanced Info ServiceFitch Ratings8. Its liquidity should be supported by a cash balance of THBFitch RatingsAdvanced Info Service.7 billion at end-2Advanced Info ServiceFitch Ratings7, sufficient to cover debt maturing in 2Advanced Info ServiceFitch Ratings8 of THB9.3 billion. AIS has a committed loan facility of THBFitch Ratings5 billion as of end-September 2Advanced Info ServiceFitch Ratings8 to support the negative FCF.