China Mobile’s 4G Subscribers Soar In August; iPhone 6 Could Provide Further Boost

China Mobile (NYSE:CHL) continued its strong run in the Chinese wireless market in August, with robust gains in 4G and 3G subscribers. The carrier added over 9.1 million 4G and 1.3 million 3G subscribers in the month, compared to the combined tally of about 3 million additions by rivals China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA) in the same period. China Mobile’s 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. However, it is interesting to note that while the carrier’s gain in 4G subscribers in August was 40% higher than the tally in July (6.5 million), 3G user additions fell by about 45% in the same period.

The company 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. This helped China Mobile grow its 4G subscriber base exponentially from just over 1.3 million users in February to over 29.5 million users at the end of August. Apple‘s (NASDAQ:AAPL) latest iPhones could further boost China Mobile’s 4G user base when they are launched in China.

China Mobile’s total wireless subscriber base at the end of August was 796 million, including about 272 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 over 110 basis points over the prior month to over 34%. ^{[1] [2] [3]}

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

China Mobile Likely to Gain Most From iPhone 6

Apple recently launched the iPhone 6 and iPhone 6 Plus models worldwide, but these models are not yet officially available for sale in China. According to a media report, the Chinese Ministry of Industry and Information Technology has yet to award the required license to Apple to sell its latest iPhone in the country and it is speculated that Apple may have to wait until 2015 for the official launch. ^[4]

We believe that whenever the latest iPhones are launched in China, China Mobile stands to gain the most among domestic carriers because its capacity to offer lucrative deals, including subsidies, is still very difficult to match for the smaller players. This is expected to continue in the near future despite the fact that handset subsidies in the Chinese market are likely to decline going forward with the surge in popularity of low cost smartphones and the carriers’ growing focus on profitability. China Mobile also stands out because of its strong 3G customer base and expansive 4G network, unlike China Telecom and China Unicom who have just started building their own 4G networks.

Handset Subsidy Reduction to Improve Profitability

In its recent interim 2014 earnings release, the company reported an 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 fees, 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 pressure on 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)) ^[5]

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. ^[6]

If the carrier manages to reduce its total subsidies by the intended 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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1. Operation Data, China Mobile, September 2014 [↩]
2. Operating Data, China Unicom, September 2014 [↩]
3. Key Performance Indicators, China Telecom, September 2014 [↩]
4. Apple’s iPhone 6 still one license away from elusive China launch, Reuters, September 18 2014 [↩]
5. Presentation, China Mobile, Aug 14 2014 [↩]
6. China Mobile Surges on Planned $2 Billion Cut in Subsidy, Bloomberg, Aug 15 2014 [↩]