The Chinese government awarded TD-LTE licenses to all three telecom carriers in China in December of last year to offer fourth generation cellular (4G) services. China Mobile (NYSE:CHL), which had been at the forefront of TD-LTE (Time Division- Long Term Evolution) rollout and trials in the country, was also the first telecom carrier to launch its 4G services. The company, which dominates the Chinese wireless telecom market with more than 60% market share, started offering its 4G Internet and voice services to smartphone users on the TD-LTE standard in monthly packages starting 40 yuan ($6.62) in 16 cities. The company plans to expand its 4G services to more than 340 cities in the country by the end of 2014. In an effort to improve the supply of TD-LTE compatible smartphones in the market, China Mobile entered into agreements with many popular manufacturers such as Apple (NASDAQ:AAPL), Samsung (NYSE:SSNLF), Sony, Lenovo, Huawei and Xiaomi. ((China Mobile adds new data packages for 4G, ahead of Apple iPhone launch, Telecom Lead, January 15, 2014)) 
China Mobile is going to face some competition in the 4G space, as China Telecom (NYSE:CHA) announced its 4G service launch on February 14, while Chinese media reports suggest that China Unicom (NYSE:CHU) is also likely to launch its 4G services in the first week of March. However, China Telecom currently offers 4G services through data cards only, and China Unicom is also unlikely to enter the 4G smartphone market in the near term. This presents a great opportunity for China Mobile to take a substantial lead in 4G subscriptions, which could help improve its average revenue per user (ARPU) and declining telecom market share.
We currently have a price estimate of $55 for China Mobile, which is about 15% ahead of the market price.
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- China Mobile’s 4G Momentum Should Continue After Solid August Numbers
- China Mobile Earnings Driven By Data Traffic Growth
- China Mobile Q2 Preview: Will ARPU Recover?
China Mobile Likely To Improve Wireless Market Share With 4G
China Mobile has enjoyed unparalleled dominance in the telecom sector in China. With more than 760 million subscribers, the carrier controls about 62% of the overall wireless market and accounts for an outsized portion of the industry’s profits. This dominance and wide reach has enabled China Mobile to take advantage of economies of scale in the telecommunication market, which is a high fixed-cost business. However, its market share has been declining slowly for the past several years due to growing competition and chipset incompatibility issues with its 3G TD-SCDMA network. The company’s overall market share (by subscribers) declined from almost 70% in 2009 to about 62% in 2013.
China Mobile could turn around its declining market share as it expands its TD-LTE/4G network across the country in the near term. It was able to get past the incompatibility issues related to its 3G network last year and its 3G subscriptions grew by 100% in 2013. Growing 3G subscriptions should further help China Mobile add 4G subscribers, since the TD-LTE 4G standard is compatible with its 3G TD-SCDMA technology. Therefore, existing 3G customers will be able to seamlessly transition to the high speed 4G network.
The other carriers – China Telecom and China Unicom – are most likely banking on FDD-LTE technology to expand in the 4G telecom market, licenses for which have not been announced by the Chinese government. Therefore, a solid handset lineup and effective marketing can help China Mobile take the first mover advantage and gain significantly in the 4G market, which is expected to add over 72 million 4G compatible smartphone units in 2014. 
Internet ARPU To Get A Boost From 3G & 4G
China Mobile added about 38 million new 3G subscribers in 2012 and its Internet ARPU grew almost 43%. Adding 3G subscribers helps the carrier increase its ARPU levels, as 3G smartphone users consume more Internet data as compared to 2G subscribers. According to the latest subscriber data released by the company, it added over 100 million new 3G subscribers in 2013. China Mobile should continue to benefit from the growing adoption of 3G services since most of the growth is coming from data rather than voice, which has reached near-saturation. A higher ARPU directly impacts the company’s top line, and we believe that the carrier can grow its mobile Internet service revenues at double-digit rates in the near term and mid-single-digit rates in the long run.Notes: