China Mobile Continues To Lead In 3G, 4G Subscriber Adds

China Mobile (NYSE:CHL) continues to lead the Chinese wireless market in terms of market share as well as monthly 3G/4G subscriber additions. The carrier added over 12.3 million 3G and 4G subscribers in March, compared to the combined tally of about 3.5 million additions by rivals China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA) in the same period. Of China Mobile’s total subscriber additions, 9.6 million were on its 3G network and about 2.8 million were on 4G. The 3G/4G subscriber adds were consistent with the carrier’s performance in the last several months, and can be attributed to its aggressive network expansion, improved user handset options and higher subsidy offerings. The company has also benefited from the fact that the Chinese government has only awarded TD-LTE 4G licenses to carriers, while FDD-LTE 4G licenses are still pending. This is preventing rival carriers China Unicom and China Telecom from rapidly expanding their 4G networks in the country since their existing wireless networks (WCDMA 3G) are more compatible with FDD-LTE, unlike China Mobile’s TD-SCDMA 3G network.

Users had been skeptical with respect to buying China Mobile’s 3G subscriptions previously, as its proprietary 3G TD-SCDMA network did not support many of the more popular smartphones due to chipset incompatibility issues. However, the carrier has been able to drastically improve its handset options in the last few months by collaborating with local manufacturers as well as global smartphone giants such as Apple (NASDAQ: AAPL) and Samsung (PINK: SSNLF). China Mobile’s total subscriber base at the end of March was 781 million, including about 228 million high speed (3G & 4G) users. It currently holds a dominant share of 62.3% in the Chinese wireless market and is followed by China Unicom and China Telecom with 23% and 14.6%, respectively. ^{[1] [2] [3]}

We currently have a price estimate of $53 for China Mobile, implying a premium of about 15% to the market price.

See our complete analysis of China Mobile here

Rising Subsidies Weighing On Profit Margins

In its recent first quarter 2014 earnings release, the company reported a 9.4% drop in profits even as its overall revenues increased by about 8%. This decline in net profit was attributed to increasing competition in the Chinese wireless market and growing popularity of over-the-top (OTT) applications such as WeChat. In the wake of rising competition, China Mobile had to offer higher handset subsidies on popular smartphones to gain subscribers. Although higher subsidies immensely helped the carrier expand its subscriber base and 3G/4G mix, it also significantly increased its operating expenses, which led to a decline in the bottom line. This trend was visible in 2013 as well, when the carrier spent $4.4 billion in subsidy costs and added almost 104 million 3G subscribers, improving its 3G mix from 12.4% in 2012 to 25% at the end of 2013.

Going forward, we expect China Mobile to continue gaining 3G/4G subscribers, which should help improve its market share as well as 3G mix. However, profitability is likely to remain a concern for the carrier as it expects mobile subsidy expenses to rise as much as 30% this year compared to 2013 levels.

4G Network Expansion To Cost $12 Billion in 2014

China Mobile mentioned in its full year 2013 earnings release that it expects to incur capital expenditures (CapEx) of approximately RMB 225.2 billion ($36.3 billion) in 2014, about 22% more than its 2013 figure. The carrier also mentioned that 44% of its capital expenses are likely to be used in building wireless networks, of which about 75% will be spent in building about 500,000 base stations for expanding its TD-LTE 4G network. According to those estimates, the expenditures likely to be incurred in expanding the carrier’s 4G network come out to be about $12 billion. Going forward, we estimate that the company’s overall CapEx is likely to decline to about 28% of sales by the end of our forecast period, from an estimated 32% in 2014. If the expenditures do not decline as expected and remain close to 30% of sales, there could be a downside of over 10% to our price estimate.

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1. Operation Data, China Mobile, 25 April 2014 [↩]
2. Operating Data, China Unicom, April 2014 [↩]
3. Key Performance Indicators, China Telecom, April 2014 [↩]