China Mobile Set For Painful Year In 2014

China Mobile reports ugly Q1

Leading wireless telco China Mobile (HKEx: 941; NYSE: CHL) has kicked off the first-quarter earnings season with some numbers that look quite scary, reflecting a sharp slowdown as its home market shows growing signs of saturation. Adding to the problem is the rapid growth of “over the top” (OTT) apps like Tencent’s (HKEx: 700) popular WeChat, which are stealing business from China Mobile’s traditional text messaging service. I commented last month that a recent sell-off in China Mobile shares could represent a good buying opportunity, but clearly these latest results show the company is going through a period of painful readjustment that is likely to last for the rest of this year.

China Mobile’s profit tumbled 9.4 percent in this year’s first quarter, marking its third consecutive quarter of major profit contraction after years of low single-digit growth. (company announcement) On a slightly positive note, the first-quarter contraction was actually a slight improvement from the previous quarter when profit fell by 16 percent.

First-quarter revenue also looked problematic, with sale up just 7.8 percent — a slowdown from 10 percent growth in the fourth quarter and 8.3 percent growth for all of 2013. The company’s report is so filled with warning signs that it’s hard to know which ones to focus on. One of the most revealing notes that the number of text messages slipped 7 percent for the quarter, as more people turned to alternate services like WeChat that are cheaper and far more versatile.

China Mobile has faced increasing saturation in its home market for the last few years, as some 1.2 billion of the country’s 1.3 billion people now have mobile accounts. The company sounded a new cautionary note in its latest report by pointing out that many of its customers now have more than one mobile account, a relatively common phenomenon in many developed markets.

In China Mobile’s case, however, this phenomenon is a bit more worrisome since many of its customers may use their second accounts for Internet surfing and other data applications. In those cases, many of China Mobile’s oldest customers are probably signing up for second accounts with one its 2 rivals, China Telecom (HKEx: 728; NYSE: CHA) and China Unicom (HKEx: 762; NYSE: CHU). Both Unicom and China Telecom offer faster, more reliable 3G service than China Mobile’s, which is based on a problematic home-grown technology.

Thus China Mobile may be retaining many of its longtime customers, but at the same time it could actually be losing their business as they turn to Unicom and China Telecom for more reliable data services. That’s not good, since such data services are one of the fastest-growing revenue sources for mobile carriers.

China Mobile shares had bounced back somewhat since a major sell-off back in March after the company released a disappointing annual report. The stock was down 2.4 percent in early Hong Kong trade after the latest first-quarter announcement, though even after that decline they were still well ahead of their March lows.

So all of that said, what’s my latest assessment for China Mobile’s future? I’ll admit this year could be an ugly one, with profits potentially down around 10 percent for the year and revenue growth slowing to as little as 5-7 percent. But I do think the company is taking the necessary steps to turn the tide, including heavy investment in its newly launched 4G network that could help it win back some data traffic it’s now losing.

China Mobile disclosed that it signed up nearly 3 million 4G users in its first 3 months of service, and I do expect that figure to accelerate through the year. As the 4G figures pick up and China Mobile rolls out some of its own new data-based products and services, look for its situation to stabilize by the end of the year. If that happens, it could return to healthier revenue growth, and profits could start to rise again in 2015.

Bottom line: China Mobile will go through a difficult period of adjustment for the rest of 2014, but its situation should stabilize by year end and it could return to profit growth in 2015.

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