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China Mobile keeps resilient but cash flow growth lags

We expect China Mobile Limited’s revenue growth and profitability will be affected by higher competition from other telecoms companies and over-the-top (OTT) operators. While we expect the growth in 3G services seen in the first half of 2013 to continue, operating cash flow will be broadly stable as newer services are generally less profitable than legacy operations. Nevertheless, gross earnings, cash generated and liquidity will remain strong.

China Mobile’s 3G business will continue to gain traction, with 3G network utilization continuing to improve. We estimate that China Mobile’s 3G revenue surged 96 percent year on year to 52 billion yuan (US$8.5 billion) in the first half of 2013, offsetting the decline in voice revenue and short message service (SMS) revenue due to heightened competition and data for voice substitution.

However, we expect China Mobile to continue to gradually lose subscriber and service revenue market shares over the next two to three years. In addition, we forecast that China Mobile’s revenue growth will slow, and profitability will remain under pressure due to intensifying OTT substitution. In the first half of 2013, China Mobile still received 69 percent of its revenue from traditional voice and SMS services, which tend to command higher margins but have higher substitution risk.

Over the next two to three years, we expect China Mobile’s gross earnings, at best, to remain stable despite mid-single digit per annum revenue growth, as margins will continue to decline. Excluding the effect of a reclassification of handset sales, its gross earnings margin was 43.4 percent in the first half of 2013, compared to 46.2 percent in the first half of 2012. Nevertheless margins remain strong when compared to global peers.

We believe an accelerated licensing and increased government support of China Mobile’s 4G time division long-term evolution (TD-LTE) technology will help reduce its disadvantages in mobile data. China Mobile’s 3G business continues to be hindered by the inferiority of its time division synchronous code multiple access (TD-SCDMA) technology compared to competitors’ global 3G technologies, and it has been losing some high- to middle-end mobile subscribers.

China’s State Council has issued new guidelines to fast-track information technology related consumption, including targeting 4G licensing by the end of 2013 and the promotion of TD-LTE.



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