China Mobile (NYSE:CHL) recently announced a strong set of subscriber numbers for October, adding more 3G subscribers than second-placed China Unicom (NYSE:CHU) for the third month in a row. The largest wireless carrier in the world now has more than 700 million subscribers, a long way ahead of China Unicom and China Telecom (NYSE:CHA), both of which combined have less than 400 million subscribers. In 3G however, China Mobile has lagged rivals this year, adding only about 27 million 3G subscribers since the beginning of 2012 as compared to China Unicom’s roughly 30 million YTD. The recent strong showing by China Mobile in 3G could therefore a welcome sign that the carrier is working with handset makers to increase smartphone adoption on its network. It might however just as well be only a temporary upswing in China Mobile’s fortunes, as users await the launch of the new iPhone 5 on rival networks in the coming months.
Either way, we see China Mobile’s 3G disadvantage (lack of the iPhone and an incompatible 3G network) as only a near-term one since 3G adoption in China is only in its initial stages and there is ample time for the carrier to increase penetration. But it will have to work with handset makers to get more popular smartphones to work on its 3G network and also roll out 4G LTE at a faster rate if it doesn’t want to lose out on the huge market share advantage it has in the Chinese market. We have a $60 price estimate for China Mobile, about 8% ahead of the current market price.
Chinese 3G market is an equitable mix
With over 700 million subscribers, China Mobile is the largest wireless carrier in the world and has more than twice as many overall subscribers as nearest rival China Unicom. But, when it comes to 3G, the difference is not nearly as wide. As of October 2012, China Mobile had 79 million 3G subscribers, only about 13% ahead of 70 million that subscribe to China Unicom’s 3G network. A low 3G penetration of around 20% in China is giving smaller carriers such as China Unicom ample opportunity to compete on an even ground with the otherwise dominant China Mobile.
Moreover, the fact that China Mobile runs its 3G network on a proprietary homegrown TD-SCDMA standard has proved to be a big deterrent for the carrier in securing smartphones compatible with its network. Even the iPhone, which has already been launched on the other two carriers in China, hasn’t made its way to China Mobile yet.
However, 3G adoption is still in its very early stages, and we expect smartphone as well as chipset makers to eventually start focusing on China Mobile’s 3G network to tap China’s burgeoning mobile base. The carrier has also, of late, started getting serious about its 3G business. China Mobile has said that it aims to sell 100 million mobile phones next year, growth of at least 25% over what it has predicted for 2012. The carrier recently brought Nokia on board for its Lumia 920T flagship smartphone and an Apple iPhone deal is also on the cards, now that the iPhone 5 has been launched with a chipset that has TD-SCDMA support. (see Qualcomm Paves the Way for an Apple-China Mobile iPhone Deal) China Mobile is also the only carrier in China that is currently testing out a TD-LTE network and could be the first to launch the high-speed technology in the country, mitigating its 3G handicap to an extent in next few years.
Opportunity huge once 3G compatibility issues are overcome
Getting its 3G act straight is important for China Mobile since we expect these services to be the biggest driver of ARPU in the coming years. 3G services have been driving the ARPU levels of many carriers in the developed world. Carriers such as Verizon, AT&T and Sprint in the U.S. have seen rapid growth in mobile data revenues over the past few years driven by growing demand for 3G-capable smartphones. This has come about even as voice ARPU has declined, a trend that can be seen in the Chinese telecom market as well. China Mobile’s voice ARPU levels have declined from around $7.40 in 2007 to about $6.50 in 2011, by our estimates.
With voice ARPU on the wane, China Mobile needs to start pushing 3G-capable smartphones to drive data ARPU levels and protect overall ARPUs from falling. 3G penetration is at a low 20% currently, so the opportunity to push 3G is immense. The number of Chinese subscribers adopting 3G is easily outstripping 2G additions every month. As 3G transition starts picking up more pace, China Mobile, which has over 600 million 2G subscribers currently, stands to gain heavily as handset makers bring out compatible smartphones and the carrier gradually rolls out a nation-wide LTE network.