The Chinese wireless market has witnessed a tremendous surge in 3G adoption recently, primarily aided by rapidly increasing sales of subsidized low-cost smartphones. This is providing the incumbent mobile operators with a highly lucrative opportunity to grow their data revenues, even as voice revenues show minimal growth.
Of the Chinese wireless carriers, we believe China Mobile (NYSE:CHL) is positioned to gain the most from the ongoing 3G transition because of its huge subscriber base and market share. With over 700 million subscribers and a 60% share of the Chinese wireless market, China Mobile is not only the largest wireless carrier in China, but globally as well. However, the company hasn’t been able to similarly dominate the 3G roll-out, struggling to launch a sizable number of smartphones that were compatible with its home-grown TD-SCDMA 3G network. Qualcomm’s (NASDAQ:QCOM) recent efforts in bringing out integrated TD-SCDMA compatible chipsets have helped mitigate some of these incompatibility concerns, boosting China Mobile’s 3G plans as a result. Recent data also shows that China Mobile’s 3G subscriber additions have begun to grow substantially. China Mobile is also betting big on 4G to drive data demand, as it lays out huge capex plans for 2013 and beyond.
We have a price estimate of $60 for China Mobile’s stock, which is 20% higher than the current market price.
3G Subscriber Addition Growth
China Mobile has seen a huge surge in 3G subscriber additions in recent months. Cumulative data for the five months ending May 2013 shows that China Mobile added 42 million 3G subscribers, a whopping 300% increase over the same period a year ago.  China Mobile’s monthly 3G subscriber additions have increased from an average of 3 million in 2012 to about 8 million in the first five months of 2013. This is in sharp contrast to last year, when China Mobile and its rivals were neck and neck in 3G subscriber additions every month.
China Mobile is also aggressively increasing sales of its 3G devices. Last year, it sold 60 million 3G devices and this year it plans to double that count to 120 million. Trefis believes that the integrated TD-SCDMA compatible chipsets from Qualcomm would give China Mobile an upper hand in the 3G market and enable it to sell significantly more 3G devices. Qualcomm’s recently launched Snapdragon S4 Plus MSM8930 processor for mid-tier smartphones is compatible not only with China Mobile’s TD-SCDMA network, but with its TDD-LTE network as well.  As a result of this, we expect the number of devices compatible with China Mobile’s network to increase going forward, resulting in faster 3G adoption among its subscriber base. This is also in sync with China Mobile’s 4G plans, as the carrier conducts nationwide trials for its 4G LTE network.
China Mobile Bets Big on 4G
China Mobile has set out ambitious plans for its 4G roll-out, given the issues that it faced with its homegrown TD-SCDMA network. The carrier is conducting nationwide trials for its 4G LTE network, and is ahead of its rivals China Unicom and China Telecom in terms of 4G rollout preparedness. China Mobile plans to invest $ 6.7 Billion in 2013, for construction of more than 200,000 4G base stations across China.  With implicit support from the Chinese Government for its indigenous 4G TD-LTE standard, China Mobile is likely to get a head start once 4G licenses are issued.
The onset of 4G could also help China Mobile finally clinch an iPhone deal, as Qualcomm makes it easier for Apple (NASDAQ:AAPL) and other smartphone manufacturers to introduce smartphones that are compatible with China Mobile’s networks. Qualcomm’s latest RF360 chipset supports a host of mobile standards, making it easier for handset manufacturers to produce a single phone for use globally. An iPhone deal with the largest carrier in China has also become increasingly imperative for Apple as it seeks to defend its market share in the wake of stiff competition from Samsung and other handset manufacturers.
On the whole, China Mobile’s future looks bright considering the fact that its 3G penetration level is only about 18% currently. Comparing this with the other two operators, China Unicom and China Telecom have 3G penetration of 37% and 49% respectively. As consumers buy smartphones and shift from 2G to 3G, China Mobile could have a potential market of more than 600 million subscribers to convert to 3G and, potentially, 4G as well. Going by the current trend, this is likely to give a major boost to its wireless data revenues, which have grown by a CAGR of 50% in the last five years.
As far as margins are concerned, China Mobile’s focus on low end smartphones sales will have a minimal impact on declining margins, since the company would incur lower subsidy expenses on low end smartphones as opposed to higher end ones. However, in the long run China Mobile should focus on sale of high end premium smartphones which provide higher data traffic and ARPU. An iPhone deal becomes imperative in this regard. It becomes all the more important when we consider the fact that the voice ARPU has been consistently declining from $7.4 in 2007 to about $6 in 2012, as per our estimates. Thus, China Mobile’s future growth increasingly rests on its ability to bring in higher data revenues from its subscribers.Notes:
- Operational Data, China Mobile Website [↩]
- Qualcomm Eyes Emerging Markets With New Entry Level Quad-Core Chipsets, Trefis, February 2013 [↩]
- China Mobile Raises CapEx Guidance To Fund LTE Rollout As Data Demand Surges, Trefis, March 2013 [↩]