Scenarios That Could Impact China Mobile’s Valuation

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China Mobile

China Mobile (NYSE:CHL) is the world’s largest wireless carrier with about 816 million subscribers, and it leads the Chinese wireless subscriber market with a dominant share of about 63%. The Chinese wireless market has only two other major players – China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA) – and there is currently fierce competition among them for high speed (3G and 4G) subscribers with 4G networks (FDD-LTE and TD-LTE) being promoted and expanded in a big way in the country. By the end of April, over 170 million subscribers were using 4G services in China with about 85% of them on China Mobile’s network.

China Mobile has raced past its rivals in adding 4G subscribers in the last year because of its first mover advantage. The Chinese government awarded TD-LTE 4G licenses in December 2013, which only benefited China Mobile since the smaller players intended to build and expand their 4G networks using the FDD-LTE standard. The lack of FDD-LTE licenses prevented China Unicom and China Telecom from rapidly expanding their 4G networks in the country since their existing wireless networks (WCDMA 3G) was more compatible with FDD-LTE, unlike China Mobile’s TD-SCDMA 3G network. This helped China Mobile grow its 4G subscriber base exponentially from just over 1.3 million users in February 2014 to 90 million in December 2014 to over 153 million users at the end of April 2015. The government only recently awarded FDD-LTE 4G licenses to carriers, and the smaller carriers have had a relatively slow start to their 4G campaigns.

In this article, we discuss the possibilities of a rise in China Mobile’s market share and its impact on the company’s valuation. We also discuss the impact of competition on the company’s ARPU (Average Revenue Per User) and how that could impact the company’s stock price. We currently have a price estimate of $64 for China Mobile, implying a slight discount to the market price.

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See our complete analysis of China Mobile here

Market Share Gains On 4G Adds (+5% Valuation Impact)

China Mobile’s total wireless subscriber base at the end of April 2015 was about 816 million, including over 382 million high speed (3G & 4G) users. The wireless major enjoys a dominant share of over 62.7% in the country’s wireless market, reporting an improvement of 40 basis points since the start of the year. It is followed by China Unicom and China Telecom with about 22.5% and 14.6%, respectively. The steady gain in high speed subscribers over the last year has helped China Mobile improve its 3G/4G mix from just 25% in 2013 to almost 47% at the end of April 2015.

Even though the Chinese government awarded full FDD-LTE 4G licenses to the smaller carriers in February this year, they have been slow to take complete advantage. China Mobile had an over 80% share of net high speed user additions in the country in the first four months, with second largest carrier China Unicom adding just 5% of total additions. We forecast China Mobile to steadily increase its market share going forward, albeit at a relatively conservative pace. However, if the carrier can ward off competition and continue with its rapid market share gains to report its 2011 levels of 66%, we could see an upside of about 5% to the company’s valuation.

ARPU Decline on Higher Competition (-10% Valuation Impact)

China Mobile has over 153 million 4G subscribers with a 4G mix of about 19% (April 2015). Several reports in the media towards the end of last year 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. China Mobile’s latest subscriber addition numbers reflect this revised strategy of focusing solely on promoting its 4G network. Higher 4G penetration is good for the company’s top line, as high speed subscribers generally use more data than 2G and 3G users due to the network’s higher Internet speed, which helps in increasing ARPU.

Despite the growing high speed user base, China Mobile’s overall ARPU declined 10% y-o-y to $9.85 in 2014. This was likely because the decline suffered by voice and SMS/MMS revenues offset the increase in its Internet ARPU. Going forward, 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 last year, they used 44% of the total data on the carrier’s network. Notwithstanding the 10% decline in monthly ARPU in 2014, 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. However, if the intense competition does not allow China Mobile to increase plan prices and its monthly Internet ARPU increases only to $5 from our currently anticipated $6 levels, we could see a downside of over 10% to our price estimate for the stock.

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