Hong Kong, May 10, 2019 -- Moody's Investors Service ("Moody's") has downgraded Dr. Peng Telecom
& Media Group Co., Ltd.'s ("Dr. Peng Telecom")
corporate family rating to B3 from B2.
At the same time, Moody's has downgraded Dr. Peng Holding
Hongkong Limited's senior unsecured rating to B3 from B2. The notes
are unconditionally and irrevocably guaranteed by Dr. Peng Telecom.
The ratings are on review for further downgrade.
RATINGS RATIONALE
"The downgrade reflects Dr. Peng Telecom's elevated refinancing
risk, as its weakened operating cash flow and cash holdings will
be insufficient to meet its repayment needs through 2Q 2020," says
Danny Chan, a Moody's Assistant Vice President and Analyst.
"The downgrade also reflects increasing uncertainty over its ongoing
business transformation amid the fast-changing industry landscape,"
says Chan, who is also Moody's Lead Analyst for Dr.
Peng Telecom.
Dr. Peng Telecom's revenue and cash flow have deteriorated
materially in the past 12-18 months amid intense competition among
broadband internet access operators in China. The company reported
negative operating cash flow in 1Q 2019 for the first time since 2013,
partly driven by weak revenue and higher costs.
Moody's expects the company will continue to generate weak cash
flow in the next 12-18 months. Subscriber numbers declined
by 10% in 2018, compared to 2% growth in 2017 and
35% growth in 2016, and in turn resulted in loss of broadband
market share. The decline in the company's broadband subscriber
base will reduce its recurring monthly subscription revenue, which
is paid annually in advance. As a result, Moody's expects
Dr. Peng's broadband revenue and operating cash flow --
which account for 77% of total revenue -- will deteriorate
further.
Dr. Peng Telecom's USD notes are due in June 2020, with approximately
USD410 million of principle outstanding. In addition, the
company has two onshore notes totaling RMB2 billion becoming puttable
in April and June 2020.
At 31 March 2019, Dr. Peng Telecom had cash and deposits
of RMB1.75 billion. Its cash to short-term debt coverage
has deteriorated substantially considering its repayment needs of about
RMB4.8 billion by 30 June 2020.
Amid intense competition for broadband services in China, which
has weakened Dr. Peng Telecom's market share, revenue
and cash flow, the company continues to gradually shift its focus
to broadband applications, network installation and maintenance
services, as well as internet data center (IDC) operations.
Nevertheless, broadband internet access remained the major revenue
and cash flow driver for Dr. Peng Telecom in 2018, accounting
for more than 70%-80% of gross profits and operating
cash flow. While its broadband applications and network installation
and maintenance services are also starting to contribute to revenue,
these businesses carry lower profit margins than broadband internet access.
The company's business transformation will therefore entail execution
risk and pose some risk to the company's revenue and cash flow.
The ratings are on review for downgrade, reflecting the refinancing
risk on the upcoming maturities and the uncertainty on its business profile.
Moody's review will focus on Dr. Peng Telecom's: (1)
progress in securing access to onshore and offshore funding to repay its
upcoming debt maturities; and (2) business plan to stabilize the
decline in its sales and operating cash flow.
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,
and offers, among other things, broadband internet access
and application services.
Headquartered in Beijing, the company was founded in 1985 and listed
on the Shanghai Stock Exchange (600804.CH) in 1994.
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.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
noted in the Regulatory Disclosures as a Non-Participating Entity,
the rated entities are participating and the rated entities or their agent(s)
generally provide Moody's with information for the purposes of its
ratings process. Please refer to www.moodys.com for
the Regulatory Disclosures for each credit rating action under the ratings
tab on the issuer/entity page and for details of Moody's Policy
for Designating Non-Participating Rated Entities.
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.
Danny Chan
AVP - 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
