China Mobile’s Steady Subscriber Adds Continue In May As 4G Picks Up

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China Mobile (NYSE:CHL) continued its strong run in the Chinese wireless market last month, with robust gains in 3G and 4G subscribers. The carrier added over 4.3 million 3G and 3.3 million 4G subscribers in May, compared to the combined tally of 4.3 million additions by rivals China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA) in the same period. China Mobile’s 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. This helped China Mobile expand its 4G subscriber base by about 70% from 4.8 million users in April to over 8.1 million users in May.

China Mobile’s total wireless subscriber base at the end of May was 787.3 million, including about 244.4 million high speed (3G & 4G) users. The wireless major enjoys a dominant share of 62.4% in the country’s wireless market, reporting an improvement of 20 basis points in the last four months. It is followed by China Unicom and China Telecom with 23.2% and 14.4%, respectively. The steady gain in high speed subscribers also helped China Mobile improve its 3G/4G mix by 80 basis points over the prior month to 31%. [1] [2] [3]

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We currently have a price estimate of $53 for China Mobile, implying a premium of about 10% to the market price.

See our complete analysis of China Mobile here

Handset Subsidies And 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.

China Mobile announced in its Q4 2013 earnings call that its subsidy costs were likely to increase by about 30% year-over-year to $5.7 billion this year as 4G adoption grows and demand for premium handsets rises. However, certain media reports suggested last month that all three Chinese carriers were planning to cut handset subsidies in a bid to improve profitability. The report further suggested that China Mobile could trim its subsides by as much as $1.6 billion from its 2014 estimate.

If the carrier reduces its subsidies by $1.6 billion in 2014, it could keep its total subsidy expenses around prior year levels of $4 billion. Since 3G and 4G subscriber additions are expected to improve the carrier’s 3G/4G mix and Average Revenue Per User (ARPU) due to higher internet data usage, we expect the company’s top line to grow rapidly in the near term. Combined with reduced operating expenses in the form of lower subsidies, higher revenues would translate into improved profits. This is likely to help the carrier offset financial concerns related to increasing competition from rival carriers as well as OTT applications, the introduction of the VAT, and the revenue pressure due to an unfavorable revision in carrier interconnection fees.

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Notes:
  1. Operation Data, China Mobile, June 2014 []
  2. Operating Data, China Unicom, June 2014 []
  3. Key Performance Indicators, China Telecom, June 2014 []