China Mobile Continues To Dominate As 4G Subscribers Cross 50 Million

China Mobile (NYSE:CHL) reportedly achieved its year-end target of 50 million 4G subscribers by the end of October, two months ahead of schedule. According to a recent Reuters report, China’s state-owned Assets Supervision and Administration Commission made such an announcement last week, although the carrier has yet to release its latest operational data confirming the news. ^[1]

The world’s largest carrier has had a strong run in the country’s 4G market this year. The carrier added about 41 million 4G and 53 million 3G subscribers in the nine months ending September 2014, compared to the combined tally of less than 33 million additions by rivals China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA) in the same period. China Mobile’s subscriber adds can be attributed to its aggressive network expansion, improved user handset options and higher subsidy offerings. By the end of October, China Mobile had installed 570,000 4G base stations in 300 cities, covering 75% of the country’s population of about 1.4 billion. ^[2]

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 about 41 million users at the end of September and 50 million at the end of October. Apple‘s (NASDAQ:AAPL) latest iPhones are likely to boost China Mobile’s 4G user base further, after their launch in the country on Oct 17.

China Mobile’s total wireless subscriber base at the end of September was 799 million, including about 285 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 over 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 10 percentage points in the last nine months to 35.7%. ^{[3] [4] [5]}

We currently have a price estimate of $58 for China Mobile, implying a slight discount 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 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 Subsidies Impacting Profitability

China Mobile’s net income declined 12% in Q3 and about 10% in the first nine months of the year, primarily on account of higher subsidy expenses incurred by the carrier and higher discount offerings due to rising competition. 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.

In a bid to improve profitability, China Mobile announced in its earnings call in August 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. In addition, the company recently revised its pricing strategy for high-end smartphones such as the iPhone and also stated that it intends to focus on low-cost handsets to cater to the country’s mass markets. This should certainly help the carrier improve profitability going forward. ((China Mobile Surges on Planned $2 Billion Cut in Subsidy, Bloomberg, Aug 15 2014)) ((China Mobile Taking Steps to Cut Smartphone Subsidies, Bloomberg, Sept 26 2014)) ^[6] ((Chinese carriers to lower subsidies on smartphone purchases, WantChinaTimes, May 23 2014))

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1. China Mobile topped 50 million 4G subscribers end-October, Reuters, Nov 13 2014 [↩]
2. China Mobile 4G Subscribers Have Broken through 50 Million to Complete Annual Target in Advance, CN-C114.net, Nov 17 2014 [↩]
3. Operation Data, China Mobile, October 2014 [↩]
4. Operating Data, China Unicom, October 2014 [↩]
5. Key Performance Indicators, China Telecom, October 2014 [↩]
6. China Mobile Surges on Planned $2 Billion Cut in Subsidy, Bloomberg, Aug 15 2014 [↩]