1、 Special Report 14 September 2020 1 Corporates Telecommunications Global 5G Investment Upcycle in Global Telecoms Telcos to Press on Despite Uncertainties, Raising Pressure on Credit Profiles Special Report 14 September 2020 2 Corporates Telecommunications Global 5G Investment Upcycle in Global Tele

2、coms Telcos to Press on Despite Uncertainties, Raising Pressure on Credit Profiles 5G deployments in 1H20 have progressed slowly in most parts of the world amid the coronavirus pandemic and the corresponding delays in spectrum auctions. However, Fitch Ratings expects rising pressure on the sectors c

3、redit metrics, with higher 5G spending in 2021-2022 and the tough economic environment delaying economic returns. Nearly half of the 90 publicly rated companies in our global telecom portfolio (excluding tower companies) have low rating headroom, underlining the importance of prudent capital managem

4、ent through staggered investments, dividend cuts, and non-core asset sales to preserve balance-sheet strength. Diverging 5G Priorities Diverging capex patterns have emerged during the pandemic, with 5G priorities advancing in South Korea, China, Taiwan, Singapore, Australia and the US. We expect the

5、 pandemic effects on 5G rollout to be short-lived, leading to a resumption of 5G-related investments in 2021. 5G adoption will advance unevenly across the Asia-Pacific (APAC) region. Europe and the Middle East are likely to ramp up 5G rollout in 2021-2022, followed by Latin America. The alternative

6、of deprioritising 5G may put telcos at risk of falling behind rivals, as capex and spectrum spending are vital in preserving competitive capabilities in an increasingly commoditised sector. Uncertainties to Fuel 5G Risk Policy shifts to restrict the deployment of Chinese 5G equipment will raise inve

7、stment and procurement uncertainties in markets heavily reliant on Huawei Technologies Co., Ltd. and ZTE Corporation. 5G has so far offered limited success in consumer segments, due to the lack of differentiation from existing 4G services and, therefore, the ability to charge premium pricing. Its po

8、tential lies in enterprise applications that can be fully realised through a costlier deployment of a 5G standalone network. Stretched Leverage We expect operating cash flow to lag significantly behind 5G investments, keeping free cash flow (FCF) constrained over the next three years. Our forecasts

9、include staggered 5G capex and spectrum cost as these become certain, with low visibility on returns during the rating horizon. The impact will, however, be uneven across the portfolio, given the asymmetrical development. 5G will favour telcos with scale and strong balance sheets, which may contribu

10、te to diverging credit quality over time within the telecoms sector. “Higher-than-expected 5G investments and low visibility on investment returns will keep free cash flow constrained, reducing rating headroom over the next three years.” Janice Chong, Fitch Ratings Related Research UK Ban on Huaweis

11、 5G Equipment Increases Telecoms Capex (July 2020) What Investors Want to Know: Coronavirus Impact on Asia- Pacific Telecoms (June 2020) The Road Back: Post-Lockdown Assumptions for Global Corporates (June 2020) What Investors Want to Know: Latin American Telecoms (April 2020) Coronavirus Unlikely t

12、o Delay US 5G Wireless Network Spending (April 2020) Coronavirus Data Traffic to Raise Capex for APAC Telecom (March 2020) Global Telecoms: The Winding Road to 5G (October 2019) Analysts Janice Chong +65 6796 7241 Damien Chew +44 20 3530 1424 John C. Culver +1 312 368 3216 Sul Ahmad +1 312 368 3348

13、Special Report 14 September 2020 3 Corporates Telecommunications Global Pandemic Influencing 5G Rollout There were 23 operators deploying 5G services over January-July 2020, bringing total 5G commercial launches to 78 across 37 countries. However, 5G services in these countries are still limited, as

14、 pandemic-related disruptions led to the deferment of discretionary capex in most markets for operators to conserve cash or prioritise necessary capacity investment. Leading the way are telcos from advanced markets, such as South Korea, China, Taiwan, Australia, Singapore and the US, which are press

15、ing ahead with 5G plans to lead technology innovation. In the Middle East, the early adopters include Kuwait, Qatar and the UAE. The GSM Association (GSMA) predicts there will be 1.8 billion 5G connections by 2025, with developed Asia and North America leading the pack. It expects 5G to account for

16、around 50% of total mobile connections in these regions, ahead of Europe (34%) and the 20% global average. We envisage a resumption in 5G plans in 2021, although the economic fallout from the pandemic could curb consumer demand, including for the 5G-enabled iPhone by Apple, which is slated for launc

17、h towards the end of the year. GSMA sees greater pandemic effects in APAC given its early adoption but expects “a short- term dip rather than a long-term slump”. Fitch believes the telecoms sector in the US has modest flexibility to reduce capex, with wireless spending (including 5G) remaining a pri

18、ority. Capex intensity in North America is the lowest globally, averaging 14% in 2017-2021F, highlighting market saturation. Conversely, a heavy capex burden in APAC where emerging markets like India, Indonesia, Sri Lanka and the Philippines are already dealing with capex intensity of up to 30%-40%

19、mean operators are likely to pace 5G investments over the next few years to support cash flow. Likewise, Fitch expects telcos in Latin America to cut capex by as much as 30% and defer 5G trials to 2021 to mitigate cash burn, as the region is still transitioning to 4G. A number of countries, includin

20、g the UK, France, Spain, Portugal, Austria, Brazil, Mexico, Colombia and the Czech Republic, have postponed 5G spectrum auctions this year, and telcos have cut discretionary capex to focus on maintaining network resilience. This comes amid delays in the absence of solid business cases and restrictio

21、ns on Chinese 5G telecoms equipment in some countries. We also expect a delayed 5G rollout to 2021 in western Europe as operators prioritise 4G network upgrade and fibre-to-the-home (FTTH) investments. The European Union target for 2025 calls for every European household to have access to download s

22、peeds to 100Mbps on a connection that is upgradeable to 1Gbps. Spain is the most advanced in terms of FTTH deployment, while Italy, Germany and the UK lag. The Cost of a Huawei Ban Procurement Uncertainties Outside of the US, restrictions on Chinese 5G equipment could delay 5G rollouts and place imm

23、ense pressure on telcos that keep prices affordable, particularly in the emerging markets. According to GSMA, Huawei and ZTE had a combined market share of more than 40% of global radio access network (RAN) revenue in 2018, almost double the percentage in the US. India has yet to announce an officia

24、l ban on Chinese telecoms equipment. However, an escalating border dispute with China may lead to restrictions on the participation of Chinese equipment vendors, which could serve as reference for other markets in determining 5G cost implications and the success of open RAN architectures. Chinese ve

25、ndors account for more than half of the Indian telecom equipment market, largely concentrated among Vodafone-Idea, Bharti Airtel Limited (BBB-/Negative) and state- owned BSNL. Reliance Jio is the only telco in India that does not use any Chinese equipment and is planning to develop its home-grown op

26、en RAN 5G solution. A 5G spectrum auction was originally planned to take place in early 2020, but has now been delayed to 2021. In spite of this, many countries such as Spain, Hungary, Sweden, Ireland, Bahrain, the Philippines, Thailand and Malaysia are still reluctant to ban Chinese telecom equipme

27、nt, highlighting diverging views on this issue. 00 Sub-Saharan Africa Rest of MENA Latin America CIS Global Average GCC Arab States Developing Asia Europe North America Developed Asia Source: Fitch Ratings, GSMA 5G Adoption in 2025 (% of connections) (%) 14 16 19 22 0 5 10 15 20 25 North

28、AmericaLATAMEMEAAPAC (%) Source: Fitch Ratings Telecom Capex/Revenue Across Regions Average 2017-2021F US, Australia New Zealand, Japan Romania Estonia, Poland Latvia Czech Republic Denmark UK Aug 18 Oct 18 Dec 18 Feb 19 Apr 19 Jun 19 Aug 19 Oct 19 Dec 19 Feb 20 Apr 20 Jun 20 Aug 20 Source: Fitch Ra

29、tings Timeline of Huawei Ban Across Countries Special Report 14 September 2020 4 Corporates Telecommunications Global Costly Swap Out The phase-out of Huawei 5G equipment in the UK raises concerns over inter-operability of different vendor equipment, which may prompt a replacement of existing 4G inf

30、rastructure. This could cost carriers up to GBP2 billion and a “two to three years” delay in 5G rollout, according to the government. The UK government ruling in June 2020 requires removal of all 5G Huawei equipment from the telco networks by 2027. It has also banned new Huawei 5G equipment from end

31、-2020, reversing its earlier decision to cap the vendors RAN at 35%. GSMA, in its April 2019 report, estimated that a full ban on Chinese vendors from the 5G network rollout in Europe would cost operators EUR55 billion and at least an 18-month delay of 5G launches. However, Telefonaktiebolaget LM Er

32、icsson (BBB- /Stable) and Nokia Corporation (BBB-/Stable) claimed such estimates were overstated. Another report by Strand Consult suggests a much lower price tag of USD3.5 billion for Europe to replace equipment purchased from Huawei and ZTE in 2016-2019. It assumes network upgrades will need to ta

33、ke place over time, regardless of a choice of vendors, and should therefore be viewed as a sunk cost. Alternative Network Trade restrictions on Huawei will create opportunities for technology companies such as Japans NEC and South Koreas Samsung Electronics Co., Ltd. (AA-/Stable). Samsung, which rec

34、ently clinched a deal with Verizon to supply 5G equipment, is aiming to increase its market share to 20% by end-2020. Research firm DellOro Group estimated that Samsung had a 3% share of the global telecom equipment market in 2019. NEC is the supplier of 4G and 5G networks for Japans fourth mobile o

35、perator, Rakuten. Huawei and Nordic firms Ericsson and Nokia collectively account for more than half of the worlds telecom equipment revenue, and control a majority of the RAN market. 5G equipment based on the open industry standard, open RAN, could be an alternative for operators as they seek to co

36、ntrol capex. Rakuten and US operator Dish Network led the deployment of 5G open RAN by turning to smaller vendors for their 5G rollouts. 5G Returns Still Years Off Lack of Premium Pricing in Consumer Market Our forecast assumes flattish growth in 5G markets, in the absence of meaningful 5G-supported

37、 revenue streams such as internet-of- things (IoT) or enterprise 5G services. At its infancy, 5G still lacks compelling applications that sufficiently differentiate its value from LTE services. This inhibits telcos ability to price their services at a premium. There is also a lack of willingness for

38、 consumers to pay. GSMAs “The Mobile Economy 2020” report concluded that the potential of revenue uplift from 5G is greatest in China and South Korea at around 3% growth, followed by the US (2%), but consumer intentions to upgrade to 5G are weaker in Europe, the UK, Japan 28% 17% 14% 8% 8% 25% 28% 1

39、6% 14% 10% 7% 25% HuaweiNokiaEricssonZTECiscoOthers Source: Fitch Ratings, DellOro Group Global Telecom Equipment Revenue Outer ring: 2019 Inner ring: 2018 0% 20% 40% 60% 80% 100% ChinaCISNorth America MENAGlobal average Latin America EuropeAPAC Dont knowNo extraUp to 10% moreUp to 20% more20% Sourc

40、e: Fitch Ratings, GSMA User Willingness to Pay More for 5G UK Mobile Network Operators Exposure to Huawei Network Equipment Operator Descriptions Core RAN Vodafone Vodafone Group Plc (BBB/Stable) estimates it will cost telcos up to GBP2 billion and the UKs position in 5G. Huaweis equipment accounted

41、 for 32% of its RAN sites. Cisco Ericsson, Huawei, Nokia EE, BT BT is likely to be the most affected by the ban, due to its heavy reliance on Huawei equipment for both its mobile network (under EE) and wholesale fixed-line network (Openreach). Huawei reportedly accounted for two-thirds of EEs 4G net

42、work. The ban would cost BT more than the GBP500 million it had quoted under the previous 35% cap. Ericsson, Huawei Huawei, Nokia Three UK CK Hutchison Group Telecom Holdings Limiteds (BBB+/Stable) UK operations did not provide any cost estimates, but a ban could delay 5G rollout up to 18 months. Th

43、e telcos exposure is limited to Huaweis 5G RAN, as it uses Nokia 5G core placing it in a better position than domestic peers that use Huaweis 5G core network. Three is now switching to its alternative vendor for 5G RAN, Ericsson. Nokia Nokia, Samsung, Ericsson, Huawei O2 O2 has the smallest direct e

44、xposure to Huawei equipment, although it has a network-sharing agreement with Vodafone. Ericsson Ericsson, Nokia Source: Fitch Ratings, , companies Special Report 14 September 2020 5 Corporates Telecommunications Global and Australia. Europe is likely to be more content with 4G speeds, and weak econ

45、omic conditions there may curb consumer spending. Telcos have sought to maintain 5G tariffs at current 4G prices to drive subscriber migration at its infancy, although 5G price plans typically fall at the higher end of the range of unlimited plans. None of the US operators are charging extra for the

46、ir 5G plans. Verizon Communications Inc. (A-/Stable) back-tracked on previous plans to charge additional USD10 monthly for its 5G unlimited plans. Verizons high-band millimetre wave frequencies offer faster 5G speed, but lack coverage. T-Mobile US, Inc. (TMUS, BB+/Stable) was the first in the US to

47、offer nationwide 5G rollout in December 2019, and AT telcos found some success in luring subscribers to migrate to higher-priced 5G tariff plans. The Korean 5G user base swelled to 7 million by end-May 2020, representing 10% of its total mobile connections, just over one year after its commercial la

48、unch in April 2019. Koreas 5G proliferation was driven by generous 5G handset subsidies and the popularity of unlimited data plans bundled with music streaming and media content services, while the government had pushed for sufficient spectrum in the mid-band (3.5GHz) and millimetre wave (28GHz) as

49、early as July 2018. Domestic telcos are also developing adjacent businesses to fuel growth, including content creation, 5G-based cloud gaming, and augmented reality. Carriers have managed to reverse declines in wireless revenue since 2019. However, this is not typical of most other telecom markets. SK Telecom Co., Ltd (SKT, A-/Negative), KT Corporation (A/Stable) and LG Uplus announced plans to invest up to KRW25.7 trillion (USD2