The past week saw all the Chinese telecom companies release their annual earnings for 2012. While all the carriers benefited from the ongoing 3G transition as mobile data revenues grew strongly, there are some company-specific CapEx trends that emerged.
While China Mobile (NYSE:CHL) is betting heavily on 4G to pull it out of the difficult 3G position it finds itself in with its incompatible TD-SCDMA network, smaller carriers China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA) are treading the 4G waters more slowly. As a result, while China Mobile expects to incur almost 50% more capital expenses this year as compared to 2012, China Unicom is looking to spend about 20% less on its network than last year. Meanwhile, China Telecom has bought the CDMA network assets from its parent company, which will help it avoid paying the high network leasing fees from this year onward and improve margins.
The largest wireless carrier in the world added close to 61 million subscribers in 2012 to take its total subscriber base past 700 million, and grew revenues by more than 6% over 2011. More than 60% of the total subscribers added during 2012 were 3G, which suggests that traction for the carrier’s homegrown TD-SCDMA network is gradually picking up after lagging rivals initially. As expected, voice revenues grew sluggishly by about 1%, while surging demand for smartphones and data helped China Mobile more than make up for the slack with close to 20% growth in data revenues. While a big chunk of China Mobile’s revenues still comes from voice (over 70%), data is growing fast. We expect this to sustain going forward as the carrier rolls out 4G TD-LTE in the coming months and looks to transition its huge subscriber base away from 2G quickly.
However, in order to sustain the huge data demand and roll out a LTE network, the carrier guided for almost a 50% hike in capital expenditures in 2013. Compared to RMB 127 billion spent on network upgrades last year, China Mobile expects to incur more than RMB 190 billion in CapEx spend this year. More than 50% of its mobile network spending, or about $7 billion, will be driven by TD-LTE, which the company is looking to build out in the coming months. Going forward, we expect the high network investment to continue as the company looks to expand its LTE network to new regions and uses it as the primary network for data traffic in the future. (see China Mobile Raises CapEx Guidance To Fund LTE Rollout As Data Demand Surges)
The third largest carrier in China saw its net profit for the full year drop almost 10% over 2011 on higher subsidies and marketing spend brought about by the launch of the iPhone earlier last year. However, revenues continued to climb at a good pace, growing by about 16% y-o-y to RMB 283 billion. Most of this growth came on another strong year for the mobile division where data revenues grew close to 50% over 2011, as 3G adoption picked up and ARPUs improved on account of the iPhone’s launch and other marketing initiatives. Growing 3G penetration also helped China Telecom pick up market share at the expense of the largest carrier, China Mobile, which has lagged rivals due to the lack of the iPhone and an incompatible 3G network. Almost all of China Telecom’s 34 million net adds last year subscribed to its 3G network, helping the carrier capture almost 15% of the overall market and 30% of the 3G market.
However, the carrier’s decision to buy CDMA network assets from its parent company took a toll on its balance sheet, which is now saddled with over $7 billion more net debt than at the end of 2011. The move will however help China Telecom avoid paying network leasing expenses from this year onward, thereby pushing its mobile EBITDA margins up. The carrier had incurred more than $4 billion in network leasing fees last year, which was a 34% jump over 2011 and accounted for almost 22% of its mobile revenues. With the addition of the mobile network to China Telecom’s assets, the carrier will also incur additional capital expenditure in maintaining and upgrading the network to 3G/4G. As a result, its CapEx guidance for 2013 is RMB 75 billion, up by almost 40% from last year. (see China Telecom’s Heavy Investment In 3G Is Paying Off)
The second largest wireless carrier in China grew strongly last year, increasing its revenues by 19% over 2011, on strong 3G adoption and growing demand for mobile data services. China Unicom’s 3G revenues last year were up by an impressive 83% y-o-y. In order to drive this growth, the company sold a lot more 3G-capable smartphones than last year (handset sales grew by 67% y-o-y), but managed to control subsidies by focusing on cheaper $150 options. Subsidy costs as a percentage of 3G service revenues decreased from close to 18% in 2011, to about 10% last year, helping China Unicom grow its net income at a faster rate (68%) than revenues. Growing 3G adoption also helped the carrier pick up market share. More than 90% of China Telecom’s nearly 40 million net adds last year subscribed to its 3G network, helping the carrier capture almost 22% of the overall market and 33% of the 3G market.
However, the carrier continued to lose cash due to a sustained high level of capital investment on its mobile network. The carrier upgraded all of its 3G base stations to HSPA+ in order to attract high-end 3G subscribers and sustain the growing data demand. The RMB 100 billion in capital expenditures it had to incur last year, was 30% higher than 2011. Consequently, the company generated negative free cash flow of about RMB 30 billion last year, triple the negative RMB 10 billion it had generated in 2011. In 2013, however, the carrier plans to slow down on network spending and conserve cash for a possible 4G expansion in the coming years. We expect network spending to resume once 4G licences on the mainland are issued, possibly later this year.