Fitch Ratings expects profit margins at Thailand’s two leading mobile operators, AIS and dtac, to improve next year despite flat or slow (mid-single-digit) revenue growth.

By the end of next year, the agency forecasts AIS’ operating EBITDA margin to rise to 46-50 per cent from 45 per cent last year and dtac’s to increase to 36-41 per cent from 33 per cent in 2013.

The earnings growth is supported by regulatory cost savings as more subscribers and traffic move to 3G networks. Following the issuance of 3G licences, the operators pay the government less than under the 2G concession framework.

Fitch predicts that AIS’ regulatory costs as a percentage of service revenue will drop to around 18 per cent next year from 23.5 per cent in 2013. However, the cost savings could be partly offset by higher marketing expenses because it will likely continue promoting 3G handsets and data usage.

AIS is the market leader with a 45 per cent market share (by connections) and dtac is number two with a 30 per cent share.

Fitch said strong data revenue growth is likely to continue but will be negated by a fall in voice revenue due to intense competition in the saturated market.

Although dtac’s marketing costs also will remain high throughout next year, it said this should be largely offset by the savings stemming from changes in the regulatory framework.

Fitch has upgraded dtac’s outlook to positive from stable. Despite slow revenue growth and heavy investment for 3G network expansion over the next three years, it expects dtac’s financial leverage to stay below 1.5x because of strong earnings growth.

Continued high capex and potential spectrum investment will lead to negative free cash flow for both operators as well as an increase in financial leverage next year. However, Fitch said the companies have the financial flexibility to support the investments.

Fitch believes AIS should be able to maintain its service revenue market share of over 50 per cent over the medium term since it benefits from a competitive cost structure due to its large subscriber base.