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Rating Action:

Moody's affirms Hong Kong Telecommunications' Baa2 ratings; outlook stable

09 Aug 2018

Hong Kong, August 09, 2018 -- Moody's Investors Service has affirmed the Baa2 ratings of Hong Kong Telecommunications (HKT) Limited and its subsidiaries.

The affected ratings include Hong Kong Telecommunications' issuer rating, and the senior unsecured ratings for the bonds issued by HKT Capital No. 1 Limited, HKT Capital No. 2 Limited, HKT Capital No.3 Limited, HKT Capital No. 4 Limited, and PCCW-HKT Capital No.5 Limited. These bonds are guaranteed by Hong Kong Telecommunications and its parent, HKT Group Holdings Limited (HKT Group).

The outlooks on all the ratings above are stable.

RATINGS RATIONALE

"Hong Kong Telecommunications' Baa2 ratings primarily reflects its leading market position in Hong Kong as, together with its parent PCCW Limited, the best-in-class quad-play telecommunications services provider," says Gloria Tsuen, a Moody's Vice President and Senior Analyst.

"Although the company's adoption of new accounting standards results in a rise in its financial leverage, this increased level remains within the tolerance level for the Baa2 rating category," adds Tsuen.

Hong Kong Telecommunications has around 60% in fixed-line and broadband market shares by line connections, and it also has the leading market position among post-paid subscribers in mobile services, according to the Office of the Communications Authority and based on data as of the end of 2017. In addition, PCCW is the leading pay-TV operator in Hong Kong and it also has free-TV and over-the-top ("OTT") businesses.

Following HKT Limited's adoption of new accounting standards HKFRS15 (on revenue from contracts with customers) and HKFRS16 (on leases), its restated adjusted debt/EBITDA for 2017 was 3.6x, up from 3.0x based on previous accounting standards. Likewise, its adjusted retained cash flow (RCF)/debt was 12% (vs. 17.9% based on previous accounting standards) and adjusted EBITDA margin was 35% (vs. 43%) in 2017.

Nonetheless, its high financial leverage relative to its similarly-rated industry peers is mitigated by its high levels of stability in earnings and cash flow.

Given that Hong Kong Telecommunications is the principal operating entity of its ultimate parent HKT Limited, Moody's focuses on the latter's financial metrics, when assessing the former's credit profile.

Moody's estimates that for the 12 months ended 30 June 2018, HKT Limited's key financial metrics remained largely similar to the levels evident in 2017, and are expected to stay stable over the next 12-18 months, reflecting the company's leading market position.

According to its announcement on 6 August, HKT Limited's revenue, excluding mobile product sales, and reported EBITDA grew 1% and 2% respectively year-on-year in 1H 2018, reflecting steady business performance despite intense industry competition. Its reported EBITDA margin, excluding mobile product sales, gained 1 percentage point to 42%, driven by continued improvements in operating efficiencies.

At the same time, HKT Limited's reported debt, including lease liabilities, increased slightly to HKD42.7 billion at the end of June 2018 from HKD41.6 billion at the end of 2017.

HKT Limited's liquidity is underpinned by its HKD2.7 billion in cash and short-term deposits and HKD5.7 billion in undrawn facilities at the end of June 2018, and limited debt maturities over the next two years.

The stable outlook reflects Moody's expectation that Hong Kong Telecommunications will maintain its leading market positions in all major segments, as well as its stable financial profile.

An upgrade would be possible if Hong Kong Telecommunications retains its solid market positions in all major segments and improves its financial profile significantly.

Specific metrics that Moody's will consider for an upgrade include (1) adjusted debt/EBITDA below 3.0x on a sustained basis, (2) an adjusted EBITDA margin above 40%, and (3) retained cash flow (RCF)/debt improving to 20%.

Downward pressure on the rating could materialize if (1) Hong Kong Telecommunications loses its leading position in the Hong Kong market, (2) the cooperation between PCCW's media business and HKT Limited decreases, or (3) HKT Limited pursues an aggressive distribution and investment strategy that results in elevated debt levels.

Specific metrics that Moody's will consider for a downgrade include (1) adjusted debt/EBITDA above 3.8x-4.0x, or (2) an adjusted EBITDA margin below 32%.

Moody's will also consider the actions and acquisition appetite of PCCW and any resultant negative impact on the credit profiles of Hong Kong Telecommunications (HKT) Limited and HKT Limited.

The principal methodology used in this rating was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Hong Kong Telecommunications (HKT) Limited, the ex-incumbent integrated telecommunications provider in Hong Kong, is wholly owned by HKT Group Holdings Limited. HKT Group is in turn wholly owned by HKT Limited, which is 51.97%-owned by PCCW Limited.

HKT Group consolidates all of PCCW Limited's telecommunications-related assets, including fixed-line voice, broadband, international telecommunications, and mobile services. These businesses, along with PCCW 's media business, form the quadruple-play service.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Gloria Tsuen, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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