China Mobile Continues Strong Run In Chinese Wireless Market With Robust 4G Adds

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China Mobile (NYSE:CHL) continued its strong run in the Chinese wireless market in July, with robust gains in 4G and 3G subscribers. The carrier added over 6.5 million 4G and 2.4 million 3G subscribers in the month, compared to the combined tally of about 4 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 also benefited from the fact that the Chinese government has only recently awarded FDD-LTE 4G licenses to carriers, and the smaller players intend to build and expand their 4G networks using the FDD-LTE standard. The lack of FDD-LTE licenses was preventing 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. China Mobile’s 3G network is compatible with the TD-LTE 4G standard, for which licenses were awarded by the government in December last year. This helped China Mobile grow its 4G subscriber base exponentially from just over 1.3 million users in February to over 20.4 million users at the end of July.

China Mobile’s total wireless subscriber base at the end of July was 793.6 million, including over 261 million high speed (3G & 4G) users. The wireless major enjoys a dominant share of 62.5% in the country’s wireless market, reporting an improvement of 30 basis points since the start of the year. It is followed by China Unicom and China Telecom with 23.3% and 14.2% respectively. The steady gain in high speed subscribers also helped China Mobile improve its 3G/4G mix by almost 100 basis points over the prior month to about 33%. [1] [2] [3]

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We currently have a price estimate of $56 for China Mobile, implying a discount of about 10% to the market price.

See our complete analysis of China Mobile here

Massive Cut In Handset Subsidies To Improve Profitability

In its recent interim 2014 earnings release, the company reported a 8.5% drop in profits even as its overall revenues increased by about 7%. This decline in net profit was attributed to increasing competition in the Chinese wireless market, a decline in interconnection fee collection, the introduction of a Value Added Tax (VAT) and the 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. ((Press Release, China Mobile, Aug 14 2014)) [4]

In a bid to improve profitability, China Mobile announced in its recent earnings call that it intends to reduce its total handset subsidy costs to RMB 21 billion ($3.4 billion) in 2014, from the earlier estimate of RMB 34 billion. Of the total amount, the carrier has already spent RMB 15.3 billion ($2.5 billion) in the first six months of the year, which means that the company intends to spend less than $1 billion dollars in subsidies in the latter half of the year. [5]

If the carrier manages to reduce its total subsidies by the said amount in 2014, its total handset subsidy spend for the year will be 15% lower than last year’s level of around $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, Aug 2014 []
  2. Operating Data, China Unicom, Aug 2014 []
  3. Key Performance Indicators, China Telecom, Aug 2014 []
  4. Presentation, China Mobile, Aug 14 2014 []
  5. China Mobile Surges on Planned $2 Billion Cut in Subsidy, Bloomberg, Aug 15 2014 []