Why We Are Bullish On China Mobile

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China Mobile

We remain bullish on China Mobile (NYSE:CHL), the world’s largest wireless carrier, with a price estimate of $66 (about 10% ahead of the market price) , on account of its strong positioning in the Chinese high-speed wireless data market, potential for cost improvements and its fast expanding fixed-line broadband footprint. Below we take a look at some of the key factors driving our price estimate.

See our complete analysis of China MobileChina UnicomChina Telecom

Best Poised To Capitalize On 4G Growth

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Mobile data is a key growth area in the Chinese wireless industry, on account of the burgeoning internet services market and rising content consumption on mobile devices. 4G penetration as a percentage of mobile phone users stands at below 48% in China, leaving plenty of room for growth. Mobile traffic per mobile-connected end-user device is expected grow at a CAGR of 60% between 2015 and 2020 in China, according to Cisco. In comparison, growth rates in the U.S. are projected at about 35%. China Mobile looks best positioned to capitalize on this growth, given its head start in the 4G space (72% share of 4G customers in the mainland) and stronger coverage. China Mobile expects to have 1.4 million 4G base stations by the end of this year, compared to 680k for China Unicom  (NYSE:CHU) and 850k for China Telecom (NYSE:CHA). While the smaller two carriers intend to deepen their collaboration in the 4G market by sharing infrastructure, it’s unlikely that China Mobile’s churn levels will rise meaningfully, given its stronger distribution reach and its early-mover advantage.

Controlling Operating Costs

China Mobile has also been managing its costs reasonably well. For instance, the carrier has been cutting customer acquisition costs by reducing subsidies on its terminal sales. The average subsidy spend per net additional 4G customer fell by 26.6% year-over-year as of H1 2016. There have been improvements on the network operations front as well. The carrier transferred its tower assets to the China Tower JV formed in 2015, and the tower leasing fees that it incurs are slightly lower than the costs associated with operating towers itself. Moreover, there is scope for further reduction in tower costs as the sharing ratio improves, with more base stations (from the 3 participating carriers) being housed on each tower. China Mobile’s base station costs have also been improving, falling by about 13% year-over-year during H1.

Improving Fixed line Broadband Footprint

Broadband internet services have become a major focus area for Chinese telecom companies as they look to offset declines in their landline phone businesses. China Mobile’s performance in this space has been impressive, despite its relatively late entry (it was awarded licenses only in 2014).  The carrier added about 10.8 million new subscribers during H1 2016, garnering a 62% share of the net adds for tier-1 carriers, taking its market share to about 26%. China Mobile has been expanding its broadband operations via a mix of acquisitions and competitive pricing (ARPU is about 40% below wireline market leader China Telecom). The carrier can also benefit over the long term by providing bundled services to its base of 830 million+ wireless users.

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