Fitch Ratings says that China's latest cut in mobile interconnection rates will be insufficient to achieve its goal of creating a level playing field by redistributing profits from China Mobile to smaller operators.
Fitch believes that China Mobile will retain its strong market leadership position as we estimate that the proposed changes will reduce EBITDA by just 3%. The EBITDA of the second-largest operator, China Telecom, will likely rise by 3%. The ratings agency believes these changes in themselves will not be material to the companies' market positions and credit ratings, although China Mobile's ratings headroom will be reduced.
With effect from 1 January 2014, the mobile interconnection rate that China Telecom and third-largest operator China Unicom pay to China Mobile for most calls will be reduced to CNY0.04/minute. However, the rate that China Mobile pays to China Telecom and China Unicom will be maintained at CNY0.06/minute. In addition, the settlement rates for SMS and MMS would also be reduce to CNY0.01/message and CNY0.05/message respectively.
Fitch expects competition to partially offset the potential benefits to China Telecom and China Unicom, and put further pressure on China Mobile's profitability. The cut in the mobile interconnection rate payable by China Telecom and China Unicom will lower their average cost for voice traffic and may lure them to reduce tariffs to gain market share. In 1H13, the average mobile voice revenue per minute for China Telecom was CNY0.10, and CNY0.08 for China Mobile. However, Fitch does not expect a price war, as China Telecom and China Unicom focus more on mobile data than the traditional voice business.
