China Mobile’s Soaring 4G Subscribers Eclipse Sluggish 3G Demand

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China Mobile (NYSE:CHL) continued its strong run in the Chinese wireless market in November, with robust 4G subscriber additions. The carrier added about 17 million 4G subscribers in the month, compared to the combined tally of about 3 million 3G and 4G additions by rivals China Unicom (NYSE:CHU) and China Telecom(NYSE:CHA) in the same period. November marked the carrier’s best performance in terms of monthly 4G user additions to date, and was likely a result of its revised strategy of focusing solely on promoting its 4G network. Several reports in the media recently indicated that China Mobile had decided to gradually phase out its 3G network in light of waning demand coupled with the roaring success of 4G. Recent data validates this notion, as China Mobile has been a net loser of 3G subscribers in the last two months. Compared to its massive 4G subscriber gains, the carrier lost about 700,000 and 1.6 million 3G subscribers in November and October, respectively. ((Operation Data, China Mobile, Dec 2014)) [1] [2] [3]

The company continues to benefit from the fact that the Chinese government has only recently awarded FDD-LTE 4G trial 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 71 million users at the end of November.

We currently have a price estimate of $58 for China Mobile, which is in line with the market price.

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See our complete analysis of China Mobile here

China Mobile’s Market Share Dominance

China Mobile’s total wireless subscriber base at the end of November was about 804 million, including over 313 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 23.2% and 14.3% respectively. The steady gain in high speed subscribers over the last one year period has helped China Mobile improve its 3G/4G mix from just 25% in 2013 to 39% at the end of November 2014.

Subsidy Cuts To Improve Profitability

China Mobile’s net income declined 12% in Q3 2014 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 on 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)) [4] ((Chinese carriers to lower subsidies on smartphone purchases, WantChinaTimes, May 23 2014))

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Notes:
  1. Operating Data, China Unicom, Dec 2014 []
  2. Key Performance Indicators, China Telecom, Dec 2014 []
  3. RIP: China Mobile’s TD-SCDMA 3G network (2009-2014), RC Wireless, Dec 17 2014 []
  4. China Mobile Surges on Planned $2 Billion Cut in Subsidy, Bloomberg, Aug 15 2014 []