China Mobile’s First Quarter Profit Falls 9% On Rising Competition, Subsidies

by Trefis Team
China Mobile
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China Mobile (NYSE:CHL), the world’s largest wireless carrier, reported a mixed set of results in its first quarter earnings release on April 22. The carrier’s net profit declined 9.4% year-over-year (y-o-y) to RMB 25.24 billion (~$4 billion) even as its operating revenue grew about 8% to RMB 154.8 billion (~$25 billion). This decline in net profit can be attributed to increasing competition in the Chinese wireless market 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 messaging services (SMS & MMS) for the carrier. Overall SMS usage on the carrier’s network declined from about 164 billion messages in Q4 2013 to 153 billion in Q1 2014. [1]

While growing subsidy costs put a dent in China Mobile’s profits, it helped the carrier grow its 3G/4G subscriber base by almost 20% sequentially in Q1 2014 to about 228 million. 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 2.8 million 4G subscribers in the quarter. The average mobile data usage per subscriber grew by about 84% to 70 MB per month.

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 handset subsidies. 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 currently have a price estimate of $53 for China Mobile, implying a premium of about 15% to the current market price.

See our complete analysis of China Mobile here

Higher Subsidies Weighing On Profits

China Mobile’s profit declined 9.4% in the first quarter this year majorly on account of higher subsidy expenses incurred by the carrier, in addition to higher marketing costs and discount offerings. In contrast, China’s second largest wireless carrier, China Unicom, increased its first quarter profits by 74% on a growing subscriber base and focus on low-cost smartphones, which reduced its subsidy expenses (see China Unicom’s Profit Rises 74% On Revenue Growth In 3G/4G & Broadband).

Subsidy and marketing expenses were necessary for China Mobile to improve the acceptability of its homegrown 3G network. The company faced intense competition in gaining 3G subscribers earlier because rivals China Unicom and China Telecom used the internationally accepted WCDMA 3G standard, which is compatible with a majority of the popular smartphones available in the Chinese telecom market, unlike China Mobile’s homegrown SCDMA standard. Therefore, because of the limited handset options available for use on its 3G network, China Mobile had to offer much more competitive handset pricing and discounts to attract subscribers, which put pressure on the company’s margins.

China Mobile announced in its Q4 2013 earning call that its subsidy costs are likely to increase by about 30% y-o-y to RMB 35 billion ($5.7 billion) this year as 4G adoption grows and demand for premium handsets rises. We expect this to continue putting pressure on the carrier’s profit margins in the near term.

Growing 3G/4G Subscribers Drive Revenues

With a share of about 62.2% of the overall Chinese wireless market, China Mobile has a total subscriber count of over 781 million, which is about 2.5 times the U.S. population. Adding more than 36 million 3G/4G subscribers in the last three months, China Mobile improved its 3G/4G mix from 25% at the end of December 2013 to 29% by the end of March 2014. This helped the carrier increase its overall revenues by 8% y-o-y to about $25 billion in the first quarter. A higher 3G/4G mix is good for the company’s top line, as 3G subscribers generally use more data than 2G users due to the network’s higher Internet speed, which helps in increasing average revenue per user (ARPU).

Going forward, we expect overall ARPU to improve as 3G penetration increases and sales of high-end smartphones such as the iPhone expand in the Chinese market. Growth in 4G is likely to drive ARPU levels even further, 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.

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  1. Press Release, China Mobile, April 22 2014 []
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