Hong Kong, December 07, 2018 -- Moody's Investors Service has downgraded Dr. Peng Telecom
& Media Group Co., Ltd.'s corporate family rating
(CFR) to B2 from Ba3.
At the same time, Moody's has downgraded Dr. Peng Holding
Hongkong Limited's senior unsecured rating to B2 from Ba3. The
notes are unconditionally and irrevocably guaranteed by Dr. Peng
Telecom.
The outlook on the ratings above remains negative.
RATINGS RATIONALE
"The downgrade and negative outlook reflect Dr. Peng Telecom's
pressured operating performance and significantly weakened liquidity;
both factors of which have made it more challenging for the company to
refinance the bulk of its maturities in 2020, considering its limited
long-term sources of financing," says Danny Chan, a
Moody's Analyst.
"The downgrade also reflects Dr. Peng Telecom's weakening
cash flow generation, amid intense competition and ongoing investment
needs," adds Chan who is also Moody's Lead Analyst for Dr.
Peng Telecom. "These factors position the company in the
B rating category."
Dr. Peng Telecom's refinancing risk will remain high over
the next 18 months, as its offshore bond approaches maturity in
June 2020. The company will face repayment needs of RMB5.1
billion in 1H 2020, mainly comprising the USD454.35 million
worth of outstanding offshore bonds and the two onshore bonds puttable
in April 2020 and June 2020.
At the same time, the company's liquidity has weakened substantially
over the past six months, owing to weakened operating cash flow
generation and high capital expenditure and share repurchases in 2018,
resulting in a sharp reduction in its cash balance to RMB1.9 billion
at 30 September 2018 from RMB3.3 billion at the end of 2017.
If the company continues its share repurchase plan, such a strategy
could further reduce its cash buffer. In the 11 months between
January and November 2018, Dr. Peng Telecom purchased up
to RMB402 millions of its own shares.
Moody's points out that the stabilization of Dr. Peng Telecom's
operating performance remains uncertain. Moody's anticipates
that Dr. Peng Telecom will continue to show a decline in its broadband
revenue over the next one to two years, given the aggressive pricing
strategies of its competitors and the increasing usage of mobile network
over fixed broadband, which have posed structural threats to the
company's core-broadband business.
While its broadband business remains sluggish, contribution from
other businesses will be limited in the near term. Moody's
notes that the company is gradually shifting to internet data center operation.
However, heavy capital requirements and a long back-pay cycle
for its data center business will limit the pace of expansion.
As such, the company will likely report a mid-high single
digit decline in revenue over the next 12-18 months, following
a 17% year-on-year fall in revenue in the nine months
to 30 September 2018, based on Moody's estimates.
Moody's expects that the company will report operating cash flow
(OCF) of around RMB1.5-RMB2.0 billion per annum over
the next 12-18 months; a result which is significantly lower
than the RMB3.0-RMB4.0 billion per annum registered
during 2014-2017.
Meaningful recovery in OCF will be unlikely over the next one to two years,
against the backdrop of strong competition in broadband services in China.
While Moody's expects that Dr. Peng Telecom will reduce its
capital expenditure after paying down the outstanding construction cost
for its broadband business in 2018, its likely OCF in the next one
to two years would be insufficient to meet its reduced capital requirement;
thereby resulting in sustained negative free cash flow.
Moody's will continue to monitor the company's progress on
the refinancing and expansion of its onshore and offshore funding channels.
Moody's notes that Dr. Peng Telecom obtained certain facilities
in the past nine months. Access to long-term committed funding
will be crucial in sustaining its credit quality, as its outstanding
bonds approach maturity in 2020.
Dr. Peng Telecom's B2 CFR reflects the company's ownership of a
last mile broadband network, early entrant advantage and established
network coverage. These credit positives are balanced against the
rapid changes in the industry, increasing competition and more aggressive
financial policy that has included a series of acquisitions and will likely
include capital distributions.
The negative ratings outlook continues to incorporate Moody's concern
over the intense competition from well-sourced and large-sized
rivals in a market with significant regulatory risk, as well as
the heightening refinancing risks.
Moody's points out that the ratings do not face upward pressure,
given the negative ratings outlook.
Nevertheless, Moody's could revise the outlook to stable if Dr.
Peng Telecom: (1) demonstrates meaningful progress on refinancing
its upcoming maturities; (2) develops a sustainable business plan
to stop the decline in its sales and operating cash flow; and (3)
generates free cash flow.
But Moody's could downgrade the ratings if: (1) Dr. Peng
Telecom makes little or no progress on refinancing its upcoming maturities
or pursues other corporate activities that further weaken its liquidity;
(2) the company's revenue and cash flow further weaken; and/or (3)
its credit metrics weaken further or free cash flow remains negative over
a prolonged period.
The principal methodology used in these ratings was Telecommunications
Service Providers published in January 2017. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Dr. Peng Telecom & Media Group Co., Ltd.
is the fourth-largest telecommunications operator in China by revenue.
It is also the largest private telecommunications operator in the country
by the same measure, offering broadband internet access and application
services across 26 provinces and 212 cities.
Headquartered in Beijing, the company was founded in 1985 and listed
on the Shanghai Stock Exchange (600804.CH) in 1994. At 31
December 2017, Chairman Yang Xue Ping and his spouse held an approximate
11.4% stake in the company.
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.
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Regulatory disclosures contained in this press release apply to the credit
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Please see www.moodys.com for any updates on changes to
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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.
Danny Chan
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
Clement Cheuk Yiu Wong
Associate Managing Director
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
