China Mobile Earnings Driven By Data Traffic Growth

China Mobile (NYSE:CHL), the world’s largest mobile operator, published a relatively strong set of first half 2015 earnings, as revenues registered moderate growth despite the effects of the value-added tax introduced last year, while net income remained almost flat, on account of higher depreciation expenses. ^[1] The most encouraging takeaway from the earnings release was the improvement in ARPU over the second quarter, driven by solid growth in data usage. China Mobile’s ARPU, which is its primary valuation driver, had come under pressure over the last few quarters, owing to lower voice and SMS revenues and discounting related to the carrier’s 4G campaign. Below, we provide the key takeaways from the company’s earnings release.

We have a $63 price estimate for China Mobile, which is roughly in line with the current market price.

See our complete analysis of China Mobile | China Unicom | China Telecom

ARPUs Stabilizing on Increasing 4G Adoption, Higher Data traffic.

China Mobile’s reported ARPU for H1 stood at RMB 62, marking a slight decline over the same period last year. However, the number appears to have seen an improvement during Q2 2015, as the reported Q1 ARPU metric stood at 59 RMB. While traditional voice and SMS revenues continued their declines, falling by about 16% y-o-y to RMB 154.70 billion ($24.23 billion), reflecting the shift towards over-the-top applications such as WeChat and various VoIP services, this was more than offset by the growth in data and related services. Data revenues rose by about 41% y-o-y to about RMB 99.28 billion ($15.54 billion) while applications and information services revenues grew by 9% to RMB 34.62 billion ($5.41 billion) during H1. The carrier has been cutting per-unit data costs (it intends to slash prices by up to 35% by the end of this year) and this appears to be proving a net positive for data revenue, with data traffic per user per month for 4G users standing at over 2.5x the blended average, while the company’s 4G ARPU also stands at roughly 1.6x blended ARPU. Overall 4G data traffic increased by 154% as compared with the same period last year. ^[2]

Why China Mobile Should Be Able To Fend Off The Competition

China Mobile’s execution on the 4G front has been commendable, as its 4G subscriber base nearly doubled from about 106 million in January to roughly 209 million users as of July, leveraging its massive network presence and first mover advantage. However, competition has been increasing, since the smaller two players received their full 4G licenses earlier this year and have set aggressive goals for their high speed user adds. Moreover, the company is setting up a joint venture infrastructure company with smaller rivals China Telecom (NYSE:CHA) and China Unicom (NYSE:CHU), and there have been concerns that this could undermine its network coverage advantage. While the smaller two players use the FDD-LTE technology as opposed to China Mobile’s TD-LTE standard, they could still benefit since tower sharing would alleviate the shortage of prime sites, enabling them to speed up their 4G services roll-out. However, we believe that the carrier should be able to fend off the competition and defend its market share, considering its strong network which spans over 940,000 4G base stations, covering a total of 1 billion people. Moreover, the firm should benefit from internal upgrades to 4G, since just 25.5% of its 819 million strong customer base is on the LTE service. ^[3]

Key Earnings Takeaways

• H1 revenues grew by about 5% year-over-year to RMB 340.72 billion ($53.31 billion).
• Profits remained almost flat at RMB 57.33 billion ($8.97 billion)
• Average monthly churn rate for the quarter stood at 2.99% versus 3.13% for FY 2014
• Cash and bank deposits grew to $71.41 billion from about 67.01 billion at the end of 2014.
• Capex spending projected at RMB 199.7 billion ($31.26 billion) for FY’15

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1. China Mobile Press Release [↩]
2. China Mobile Interim Results Presentation [↩]
3. China Mobile Monthly Operating Data [↩]