China Mobile’s 2014 Revenues Grow On 4G Device Sales And Higher Data Traffic

China Mobile (NYSE:CHL), the world’s largest wireless carrier, reported mixed full year 2014 results with net profit declining over 10% year-over-year (y-o-y) to RMB 109.3 billion ($17.64 billion) even as operating revenues grew by 1.8% to RMB 641.45 billion ($103.53 billion) on the back of robust growth in product sales. The decline in net profits can be 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. OTT applications such as WeChat allow users to share text/picture/video messages over their phone’s Internet connection, and their increased usage resulted in a massive drop in revenues from traditional SMS and MMS messaging services for the carrier. Overall SMS usage on the carrier’s network declined about 17% from 734 billion messages in 2013 to about 611 billion in 2014, in addition to a decline of 0.5% y-o-y in total voice usage. Correspondingly, revenues from SMS/MMS and voice services fell by 16% and 13%, respectively. ^{[1] [2]}

While growing costs and declining service revenues put a dent in earnings, the carrier was able to grow its 3G/4G subscriber base by over 75% to about 336 million in 2014. Considering that data traffic is quickly becoming the primary avenue for future revenue growth, the carrier vigorously expanded and promoted its high speed 4G network, gaining 90 million 4G subscribers in its first year of launch. Going forward, we expect China Mobile to continue gaining 3G/4G subscribers faster than its rivals, owing to its larger 4G network and its ability to offer higher discounts. This robust growth in 4G subscribers is likely to help the carrier improve its top line performance going forward as well since 4G subscribers generally use more data than 2G and 3G users, which helps increase ARPU (Average Revenue Per User). However, higher costs and increasing competition from rival wireless carriers China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA), as well as OTT applications such as WeChat, might continue to weigh on profitability in the near term.

We expect 2015 to be an exciting year for the Chinese wireless market considering that all major players now have full 4G licenses and have set ambitious goals for high speed user adds. Competition should increase as the year progresses, but China Mobile should be able to sustain its growth momentum owing to its massive size and network presence. We currently have a price estimate of $56 for China Mobile, implying a discount of about 15% to the current market price.

See our complete analysis of China Mobile here

Handset Subsidies Decline

China Mobile’s net profit declined 10% in 2014 primarily on account of higher discount offerings due to rising competition and higher network maintenance costs. Marketing was necessary for China Mobile to improve the acceptability of its homegrown 3G network. The company faced intense competition in gaining 3G subscribers in 2012-13 because rivals China Unicom and China Telecom used the internationally accepted WCDMA 3G standard, which was compatible with a majority of the popular smartphones available in the Chinese telecom market, unlike China Mobile’s homegrown SCDMA standard. However, the carrier successfully dealt with this limitation by making available diverse multi-mode TD-LTE compatible handset models in the market for customers in 2014 including its self-branded models as well as mainstream brands.

In August last year, China Mobile revised its pricing strategy for high-end smartphones such as the iPhone and also stated that it intended to focus on low-cost handsets to cater to the country’s mass markets. Owing to such efforts and its first mover advantage,the company was able to cut down its handset subsidy costs by over 28% in 2014. This is a significant achievement and bodes well for the company’s plans to improve bottom line performance going forward. ((China Mobile Taking Steps to Cut Smartphone Subsidies, Bloomberg, Sept 26 2014)) ^[3] ((Chinese carriers to lower subsidies on smartphone purchases, WantChinaTimes, May 23 2014))

4G Makes Its Presence Felt In Earnings

Leveraging its first mover advantage in 4G, China Mobile rapidly expanded its TD-LTE network coverage across the country last year, setting up 720,000 base stations and covering a population of over one billion people. The company offered discounted plan rates and easy upgrade services to encourage customers to adopt 4G. This resulted in the carrier recording 90 million 4G subscribers last year and its 3G-4G mix improving from 25% in 2013 to about 42% by the end of December 2014.

The rapid rise of 4G customers along with discounted data rates resulted in solid increase in data traffic demand, which increased 115% last year over 2013 levels. The average mobile data usage per subscriber grew to 155 MB per month at the end of December 2014, from 119 MB per month at the end of June 2014 and 72 MB per month at the end of 2013. This helped the carrier increase its mobile data traffic revenues by a solid 43% y-o-y to over RMB 150 billion ($24.2 billion) in 2014, increasing the share of mobile data traffic to about 26% (from 17.8%) of overall telecommunication services revenues. In fact, excluding the data traffic revenues, telecommunication service revenues declined by over 14% driven by decline in voice revenues.

Impact Of 4G On ARPU

Research firm IDC recently reported that Apple (NASDAQ:AAPL) had a 12.4% share in total smartphone shipments in the fourth quarter last year in China. This translates to over 13 million units of Apple’s smartphones, likely dominated by the new iPhone 6 model. Considering that buyers of this expensive new model are more likely to use 4G for their smartphone data needs and China Mobile is the only established 4G network provider currently in China, it would be fair to say that it was the biggest beneficiary of this boom in iPhone sales in the country in 2014, among carriers. ((China rings up 420M smartphones in 2014, Xiaomi takes market lead, ZDNet, February 17 2015))

Growth in 4G users is likely to drive ARPU levels as 4G networks are about ten times faster than their 3G counterparts, thus encouraging subscribers to use even more data intensive applications such as high quality video calling and video streaming. This can also be gauged from the fact that even though 4G subscribers contributed only around 11% of China Mobile’s total user base, they used 44% of the total data on the carrier’s network last year. Notwithstanding the 10% decline in monthly ARPU in 2014 (to $9.85), we expect China Mobile’s ARPU to improve going forward as rising data traffic more than compensates for the decline in voice and SMS usage.

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1. Operating data, China Mobile, March 19 2015 [↩]
2. Press Release, China Mobile, March 19 2015 [↩]
3. China Mobile Surges on Planned $2 Billion Cut in Subsidy, Bloomberg, Aug 15 2014 [↩]