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Rating Action:

Moody's downgrades Dr. Peng Telecom's ratings to Ba3 from Ba2

 The document has been translated in other languages

25 Jun 2018

Hong Kong, June 25, 2018 -- Moody's Investors Service ("Moody's") has downgraded Dr. Peng Telecom & Media Group Co., Ltd.'s corporate family rating (CFR) to Ba3 from Ba2.

At the same time, Moody's has downgraded Dr. Peng Holding Hongkong Limited's senior unsecured rating to Ba3 from Ba2. The notes are unconditionally and irrevocably guaranteed by Dr. Peng Telecom.

The outlook on the ratings above remains negative.

RATINGS RATIONALE

"The downgrade of the ratings for Dr. Peng Telecom and Dr. Peng Holding reflects Moody's assessment that Dr. Peng Telecom will likely pursue a financial policy that becomes more favorable to shareholders," says Danny Chan, a Moody's Analyst.

"At the same time, the ratings downgrade reflects Moody's expectation that Dr. Peng Telecom's business plan will continue to evolve and lacks clarity on how the company will restore its weakened operating performance," adds Chan, who is also Moody's Lead Analyst on Dr. Peng.

On 20 June 2018, Dr. Peng Telecom announced its plan to purchase up to RMB900 million of its own shares over the next 12 months, subject to shareholder approval. The purchase would represent about one-third of the company's cash on hand on 31 March 2018 and 4% of total assets as of the same date. Such a move would deviate from the company's policy of simply paying out stable dividends.

If the development eventuates, the shares buyback will reduce Dr. Peng Telecom's cash buffer, against the backdrop of a highly competitive environment for its core broadband business and high investment needs.

Dr. Peng Telecom's broadband internet access business — which accounts for about 85% of total gross profits — has been under pressure over the past 12 months, as seen by the stagnant growth in the company's broadband subscriber base, and declining average revenue per user amid intensifying competition. This soft performance has translated into weakened operating cash flow since the second half 2017.

Moody's expects the company's capital requirements will remain elevated at about RMB3 billion per annum over the next 2-3 years. At the same time, Dr. Peng Telecom's ongoing need to invest in infrastructure upgrades and acquisitions could reduce its free cash flow, which has been negative over the past 12 months.

Based on the ongoing price battle in the broadband business in China, Moody's expects that Dr. Peng Telecom's revenue will fall by a mid-single digit percentage in 2018-19 and its leverage should weaken further to around 2.0x-2.5x over the next 12 months from 1.8x in 2017, owing to the company's elevated debt levels to support capital expenditure, potential capital distribution, as well as weakened EBITDA generation.

Nonetheless, the proposed share purchase will still leave Dr. Peng Telecom with sufficient cash to cover its cash needs over the next 12 months. Its cash of RMB3.1 billion at 31 March 2018 and likely operating cash inflow of RMB2.5-RMB3.0 billion over the next 12 months are sufficient to cover its short-term debt, shares buyback and capital expenditure of RMB4.3 billion over the same period.

Dr. Peng Telecom's Ba3 CFR reflects the company's ownership of a last mile broadband network, early entrant advantage and established network coverage, as well as its moderate leverage levels and diversified funding sources. These credit positives are balanced against the rapid changes in the industry, increasing competition and more aggressive financial policy that has included a serial pace 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, and the company's expansion into overseas markets and into lower margin businesses; thereby heightening execution 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 demonstrates the following on a prolonged basis: (1) a sustainable business plan to stop the decline in its sales and operating cash flow; (2) improves its credit profile with leverage below 1.5x-2.0x and free cash flow to debt above 5%-10%; and (3) pursues a disciplined financial policy.

But Moody's could downgrade the ratings if: (1) revenue and cash flow further weaken; (2) material adverse regulatory changes weaken the company's business model and market share; (3) the company undertakes an aggressive dividend policy or acquisitions which weaken balance sheet liquidity, or its access to borrowing deteriorates significantly ; and/or (4) its credit metrics weaken, with adjusted debt/EBITDA exceeding 3.0x-3.5x 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 and the largest private telecommunications operator in the country, 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.

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
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.
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