Value Beyond the Ocean

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China Mobile (NYSE: CHL) is the world’s largest telecom operator in terms of subscribers. It provides communications and related services through its nationwide mobile telecommunications network. It also designs and sells electronic communication products such as 3G handsets. Due to industry growth and increased competition, the telecom sector is witnessing mergers and acquisitions.

Fundamental analysis

In the first quarter of 2013, China Mobile’s revenue reached 134.7 billion Yuan ($21.8 billion), up 5.7% year-over-year, while the net income rose to 27.9 billion Yuan ($4.5 billion) up 0.3%, from 27.8 billion Yuan a year earlier (expected profit was 28 billion Yuan). The net margin decreased by 1.1%, making it 20.7%. The total subscriber base went up by 2.25% y/y, reaching 726.31 million subscribers.

Dipping market share

China is the largest market with more than one billion mobile connections and a penetration rate of nearly 75%. China Mobile, China Telecom (NYSE: CHA) and China Unicom (NYSE: CHU) are the leading players in the Chinese market. China Mobile is the market leader with a total market share of 64%, which fell 2% from last year, while China Telecom gained 2% market, share reaching 14%. China Unicom maintained its market share at 20%.

4G technology is the future driver

China Mobile disclosed in its annual report that it will be spending $6.7 billion on building a new 4G network. This TD-LTE 4G network will attract 500 million users in 100 Chinese cities. The new 4G network is significant for China Mobile because it has a smaller 3G market share in comparison to its competitors. 3G network subscribers account for 25% of the entire China market subscriber base, which went up by 7% in the quarter ended March 13. China Mobile 3G market share fell to 63% from 72% in 2009. Over the same period, China Unicom gained 1%, reaching 21% while China Telecom gained an increase of 7%, reaching 15%. The reason behind China Mobile’s falling 3G market share is its TD-SCDMA technology, which limits internet downloading speed to 2.8 Mbps. China Unicom uses a WCDMA technology, which allows a downloading speed of 21 Mbps, while China Telecom's CDMA 2000 technology can allow 3.1 Mbps nationwide and 9.3 Mbps in some parts of the country.

Increasing competition

China Mobile uses a TD-LTE technology, a technology developed in and for China. China Unicom has been giving a tough challenge to China Mobile by using an Internet access system based on 4G technology, instead of TD-LTE technology. This internet access-based technology, called FDD-LTE, is used by U.S and European telecom operators. China Unicom also announced plans to build a 4G network after the company receives the Chinese official grant license. This Unicom delay is useful for China Mobile, as it has already started working on its 4G network. 4G licenses are expected to be issued by the end of this year.

China Unicom profit jumped

Due to the 3G and fixed line growth, China Unicom profit jumped 89% in the first quarter from a year earlier to $308 million. China Telecom invested 100 million ($16.3 billion) in 3G technology, with which it plans to expand its 3G consumer market. To cover its invested amount, the company should consider offering 4G to remain competitive. China Telecom is the leading fixed line service provider; in the first quarter, net profit surged to 4.70 billion Yuan ($755.5 million) from 4.27 billion Yuan a year earlier.

Over the years, China Mobile’s dividend and payout ratio have been growing. In 2012, the company’s annual payout ratio was 43% and the company plans to maintain this ratio for 2013. The company has a dividend yield and EPS of 4.37% and 5.19%, respectively. The stock is trading at $51.03 and has fallen 13% in 2013.

Final words

China Mobile could face increasing competition from China Unicom, as China Unicom wants to become the largest 3G operator. China Mobile is putting in a heavy investment in its 4G technology and network infrastructure, which may shrink profits in the short term, but it is a positive sign for the company’s long-term future. I believe China Mobile is a smart investment choice and is poised to benefit from 4G growth.

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