Chinese Mobile Poised for Growth

Jeremy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There are two main players in the Chinese cell phone carrier market. The larger of the two is China Mobile (NYSE: CHL), and the smaller is its competitor China Unicom (NYSE: CHU). Both companies are well-established in the wireless communications industry and have a huge customer base. The Chinese market for cell phone coverage is not saturated yet and there are still many more people who require cell phone service, especially in the more rural parts of China. In order to fuel this expansion and also to be able to make the upcoming switch over to 4G,  both China Mobile and China Unicom have decided to invest heavily in their infrastructure. While this might cost money in the short run, the long run effect is that there will be more customers in the rural areas and profitable customers using the 4G service. Also, China Mobile and China Unicom have begun to expand outside of China, which means that they are trying to be a dominant force not just in the Chinese market but in the worldwide wireless communications market. 

Powerful ownership

The interesting thing about China Mobile and China Unicom is that they in fact both have the same ownership. Both of them are owned by the government of the People's Republic of China. They are run separately but they both are state-owned. It is quite fascinating that two state-owned companies would be competing with each other in the same market for the same customers. For outside shareholders this means that both companies have the backing of the government, which keeps outside competitors out of the market. For outside investors that means that both China Unicom and China Mobile are guaranteed a large market share in the Chinese wireless communications market. 

While both of them enjoy very large market share, both China Mobile and China Unicom have had weak results recently. China Mobile is much bigger, with a market capitalization of $206 billion, as opposed to China Unicom with a market capitalization of $31 billion. China Mobile is down 10.81% year to date, while China Unicom is down 16.98% year to date--though China Unicom is up 3.81% this quarter while China Mobile is down 1.78%.

While there is no other wireless communications company to compare to in China, the results of both companies are not great compared to SK Telecom Co. Ltd. (NYSE: SKM) from neighboring South Korea, which has had great results recently. SK Telecom is up 31.52% year to date and 14.96% this quarter. Also, SK Telecom does not enjoy the benefit of  guaranteed market share that being government-owned affords, and SK Telecom faces more competition than either China Mobile or China Unicom. 

The large domestic market

China Mobile is currently the biggest wireless communications company in the world by subscribers, with around 703 million subscribers--more than twice the population of the United States. China Unicom, on the other hand, has 222 million subscribers. China Mobile is both bigger in terms of subscribers and in terms of reach than China Unicom. According to this report by Fast Business Research, the Chinese wireless communications market is still only at 80% saturation. Both China Mobile and China Unicom have plans to increase the coverage of rural areas of China, where there are fewer cell phone users. The big cities such as Beijing, Shanghai and Guangzhou are already more or less saturated, so China Mobile and China Unicom have begun to focus on smaller cities and rural areas. One possible concern is that it is unknown whether China Mobile and China Unicom will be able to make any profit on these rural customers, at least in the short term. 

According to the report by Fast Business Research, this growth would involve investing in infrastructure, which of course costs money in the short term. China Mobile is spending a large percentage of its 2013 capital expenditure budget (42%) on investing in its infrastructure.  While this investment will be costly in the short term, in the long term this is being undertaken in order to increase the capacity in order to accommodate new customers and increase the speed for existing customers.

Both China Mobile and China Unicom also have a huge opportunity with the roll out of 4G and the growth of smartphone usage in China. According to Michael Finneran,  principal at dBrn Associates, which is a full service advisory firm specializing in wireless and mobility, internet penetration is only 42.3% in China. The current investment in infrastructure is a building block for more of the profitable smartphone users in the future.  The licenses for 4G are set to be issued in 2013. While both China Mobile and China Unicom are state-owned and unlikely to be denied licenses, it remains to be seen which one will roll it out first, although it is likely to be China Mobile. 

Expanding outside China

Both China Mobile and China Unicom are expanding outside of China as well. The interesting thing is that both of these companies are expanding internationally in different ways. China Mobile has bough Paktel, a wireless communications company in Pakistan, while China Unicom has a large joint investment agreement with the Spanish telecom giant Telefonica, SA (NYSE: TEF)China Mobile bought Paktel in 2007 and it has been increasing its market share in the Pakistani market since then. China Unicom first started its partnership with Telefonica in 2009 with a $1 billion cross-holding. The relationship between Telefonica and China Unicom was realized further when China Unicom bought a 4.56% stake in Telefonica worth an estimated $2.65 billion, while Telefonica owns about 5% of China Unicom, worth approximately $1.18 billion. Both China Mobile and China Unicom have a presence abroad, and this diversifies their risk in case of issues arising in the domestic market. 

More growth ahead

While both China Unicom and China Mobile have experienced some trouble this year, the future looks bright for both Chinese wireless communications companies. There are going to be costs in the short term while both China Mobile and China Unicom invest in their infrastructure. This is outweighed by the growth in the Chinese market and the fact that they are both expanding beyond the Chinese market. While both of them are competitors, despite the fact that they are both owned by the Chinese government, they both look like they are going to expand and grow in the future. \

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Jeremy Worthington has no position in any stocks mentioned. The Motley Fool owns shares of China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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